Financial Investing

Archive for January, 2010

Even with the chaotic economic mess that the world economies have gotten themselves into, the lure for personal investments is still on many people’s agendas. Why should this be so? To understand this question we have to go back in time to the days when hardly anybody was into personal investing.

The Post War Era

For many years after the end of WWII, most people just got by from paycheck to paycheck. The mentality towards money was that it came from hard work – period. Money was treated like cash or something comparable. People earned their money and kept the cash in their pocket, in the bank, or in a savings account. Credit was not as easy to come by, so people learned good money management skills; they lived within their means and saved a little bit when they could.

The Inflation of the 1970’s

Like a bolt of lightening out of the blue, after the care free days of the 60’s, the inflation of the 70’s and into the early 80’s affected everyone. All of a sudden, people’s savings lost their value as the cost of living rose. Those most affected were the people living on fixed incomes like pensions. On the other hand, fortunes were made by those that were into personal investments – like property or precious metals.

The Financial Services Industry

As a result of all this, the financial services industry was born. All of a sudden we were bombarded with advertisements telling us where to invest our money. We were all of a sudden bewildered by the many choices of “packaged financial products” that offered us anything from timeshares and unit trusts to pension plans and offshore investments.

The Stock Market

Many people either lost money with some of these financial services or they were wary of them. So, the stock market became a place for the ordinary person to do is own personal investing. It is true that many got burned after the crash of 1987 and the mini-crash two years later. But that just made people more conscious of the fact that you had to learn the ropes of investing in the markets – after all, some were making a fortune in these times.

Opportunity for the Knowledgeable

Throughout the last half century we have seen many changes regarding investment opportunities. We now have more information than ever and we are more clued up about the stock market and trading shares. Even with the recent recession gripping the world, nothing beats the return on investment of good quality equities.

The Key to Success

Nowadays, the key to success for personal investing  is knowledge. You must study how the world economies of today work and learn a few tricks of the trade. Successful personal investing starts with investing in your money education. Unfortunately, we didn’t learn good money management or investing skills at school – maybe future generations should.

To determine the viability of a company can be a lengthy and complex process. A quick way to narrow down the selection process would be to evaluate the financial strength of the company and the effectiveness of its management team.Financial ratio consisting of current ratio, debt-equity ratio, price-earning ratio (PER) and return on equity (ROE) is one quick way to check the status of a company.

Current Ratio

Current Ratio is an indicator of the company’s debt-paying ability over the short term (12 months or less). It’s determined by dividing the current assets by the current liabilities. If the outcome is between 1 and 2.5, the company’s financial situation can be considered as healthy. Even tough, the higher the ratio, the more liquid the company, however, anything over 2.5 would indicate that the company may be keeping too much cash and may not be investing enough to provide future growth.It’s probably also useful at this point to calculate the interest coverage ratio, which will indicate the company’s ability to service its debt. Interest coverage ratio is income before interest and tax divided by the interest expense. The greater coverage, the better it is.

Debt-To-Equity Ratio

Debt-To-Equity Ratio is an indicator of a company’s long term financial leverage. It compares the assets provided by the creditors with the assets provided by the shareholders of the company and is determined by dividing the long term debt by the shareholder’s equity.The track record of the management team can be determined by using the following ratios:

Price-Earnings-Ratio (PER)

The Price-Earnings-Ratio is the relationship between the market price of the company’s shares and the earnings per share (EPS). This ratio tells you what you would be paying for each dollar of earnings. To work out the PER; divide the share price by the EPS. Generally, a high PER would means high projected earnings in the future. However the PER actually doesn’t tell us a whole lot by itself. It’s useful to compare the PER of companies in the same industry, or to the market in general, or against the company’s own historical PER.As earnings tend to fluctuate from year to year, consider using the average earnings over the last six to ten years rather than for a particular year. It’s more valuable to look at the PER over time in order to determine the trend.

Return On Equity (ROE)

The Return On Equity encompasses the three main areas where investors can assess the company’s profitability, asset management and financial leverage. ROE represents the management’s ability to balance these three pillars of corporate management and investors will get a feel of whether they’ll receive a reasonable return on equity and assess the management’s ability to perform.

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This article written by Phil Thow