Stock Analysis: Powerful Strategies for Smart Investing 2024

Researching a stock before investing is essential, particularly in the fast-paced Philippine market. To promote well-informed decision-making, this method combines technical and fundamental examination. The following thorough methods will assist you in adequately analyzing a stock within the framework of the Philippine market:

Recognize the Business Firm Summary

To begin with, learn about the company’s business plan. Which goods and services does the business provide? How is money made from it? For example, SM Investments Corporation has various revenue streams from its retail, banking, and property development operations.

Place in the Market

Analyze the company’s standing within the sector. Is it the dominant player in the market, a budding star, or an underdog? For instance, JG Summit Holdings is a significant actor in the Philippine economy due to its substantial presence in several industries.

Additionally, assess the company’s market share, competitive advantage, and industry influence. Does it lead in innovation, customer base, or cost efficiency? Companies with strong brand recognition, strategic partnerships, and diversified revenue streams tend to have a more stable market position. Understanding a company’s role in the industry helps investors gauge its potential for long-term growth and resilience against economic downturns.

Stability of Finances: Income and Profitability

Examine the company’s revenue and earnings patterns over the past few years. Profitability and steady revenue growth are signs of strength. Use financial statements, such as the balance sheet and income statement.

Additionally, assess the company’s net income margin, operating expenses, and cash flow. A company with increasing revenues but declining profit margins may be struggling with cost management. Free cash flow (FCF) is also a critical indicator, as it shows whether the company generates enough cash to sustain operations, invest in growth, and return value to shareholders through dividends or buybacks. Comparing financial performance with industry peers provides a clearer picture of its competitive standing.

Per Share Earnings (EPS)

Examine the company’s earnings per share (EPS), which shows the profit allocated to each share. Growing EPS is indicative of rising profitability and can signal strong financial health. Compare the EPS trends over multiple years to assess consistency in earnings growth. Additionally, analyze how EPS compares to industry peers to determine if the company is outperforming its competitors. Keep in mind that stock buybacks can artificially inflate EPS, so it’s essential to evaluate EPS alongside other financial metrics for a clearer picture of profitability.

Debt Amounts

Analyze the company’s debt levels to assess its financial stability. Excessive debt can be dangerous, particularly if the business experiences financial setbacks, economic downturns, or rising interest rates. The debt-to-equity (D/E) ratio is a crucial indicator, as it compares a company’s total liabilities to shareholder equity, helping investors determine how much of the company is financed by debt versus owned capital.

Additionally, review the interest coverage ratio, which measures the company’s ability to meet its interest obligations with its earnings. A low ratio may indicate potential liquidity issues. Comparing a company’s debt levels with industry peers can also provide context—some industries naturally carry higher debt levels than others due to capital-intensive operations. Ultimately, a company with manageable debt and strong cash flow is better positioned for long-term stability and growth.

Measures of Valuation

The ratio of price to earnings (P/E)

The P/E ratio is a widely used valuation metric that helps investors determine whether a stock is overvalued or undervalued relative to its earnings. It is calculated by dividing the current stock price by the company’s earnings per share (EPS). A high P/E ratio may indicate that a stock is overvalued, as investors are willing to pay more for future growth expectations. Conversely, a low P/E ratio may suggest that a stock is undervalued or that investors have low expectations for its future earnings potential.

To make an informed decision, compare a company’s current P/E ratio with:

• Its historical P/E ratios to identify valuation trends over time.
• Industry averages to see how it stacks up against competitors.
• The overall market P/E ratio to assess whether the stock is in line with broader market conditions.

Investors should also consider the forward P/E ratio, which uses projected earnings instead of past earnings, providing insights into a company’s expected growth. However, P/E ratios should not be analyzed in isolation—factors such as company growth rates, market conditions, and economic trends should also be considered for a well-rounded investment decision.

The ratio of Price to Book (P/B)

The Price-to-Book (P/B) ratio is a key valuation metric that compares a company’s market value per share to its book value per share (assets minus liabilities). It helps investors assess whether a stock is overvalued or undervalued relative to its actual net worth.

A lower P/B ratio (typically below 1) may indicate that a stock is undervalued, meaning it trades for less than its book value, which could present a potential buying opportunity. However, it could also signal underlying financial or operational challenges within the company.

A higher P/B ratio suggests that investors are willing to pay a premium for the stock, often due to expectations of future growth, strong brand value, or competitive advantages. Companies in industries with intangible assets (like technology firms) tend to have higher P/B ratios, while asset-heavy industries (such as manufacturing or banking) typically have lower ratios.

To effectively use the P/B ratio in stock analysis, investors should:

• Compare it to the industry average to assess relative valuation.
• Analyze historical P/B trends for the company.
• Consider the company’s return on equity (ROE)—a high ROE with a moderate P/B ratio may indicate a solid investment.

For official stock prices, financial reports, and market disclosures, investors can refer to the Philippine Stock Exchange (PSE).

Prospective Growth Market Trends

Examine the industry’s trends. For example, businesses like Ayala Corporation, which makes significant investments in both fields, may be impacted by the move towards digitization and renewable energy.

Plans for Growth

Examine the business’s goals for growth or the introduction of new products. Businesses with well-defined expansion plans, such as Globe Telecom’s 5G technology investments, have room to grow.

Fifth Dividend Yield

Partially Inverted History

Examine the company’s dividend payment history. Steady and increasing dividends may indicate a company’s financial stability.

Comparison of Yields

Compare the dividend yields of different firms in the same industry. Remember how long these payouts will last while a more significant income could be alluring.

Corporate Governance and Management

Team Leadership

Examine the company’s executives. Knowledgeable and experienced management can fuel the organization’s success.

Corporate Sphere

Effective corporate governance procedures are essential. In financial reporting, look for openness and compliance with rules.

Evaluation of Competition

Rivals’ Performances

Examine the company’s comparative advantage over rivals. For instance, evaluate Ayala Corporation’s market share and financial standing in comparison to other corporations, such as SM Investments Corporation.

Financial Metrics

Macroeconomic Elements

Consider general economic variables like GDP growth, inflation, and interest rates. These may affect particular industries and the market’s mood as a whole.

Governmental Directives

Keep up on legislative changes that may impact the business. Companies that invest in the renewable energy sector, for example, stand to gain from tax benefits.

Trends in Stock Price Technical Analysis

Charts can be used to study changes in stock prices. Recognize patterns, support and resistance levels, and trends that may hint at upcoming price changes.

Analysis of Volume

Examine the volume of trading. Strong investor interest may be shown by high volume during price increases.

Evaluation of Risk

Determine the Risks

Determine any possible hazards, such as market rivalry, modifications to the law, or economic downturns.

Strategies for Mitigation

Think about the steps the organization is taking to reduce these risks. Robust risk management plans tend to make a company more resilient.

Examining Globe Telecom as a Practical Example (GLO)

• Recognize the Industry: Globe Telecom, which offers broadband, fixed-line, and mobile services, is a significant participant in the Philippine telecom market.
• Examine Globe’s financial records to assess its economic health. Consider the rise in income from broadband subscriptions and increased data use.
• Valuation Metrics: To determine Globe’s valuation, compare its P/E ratio to comparable local telecom firms.
• Growth Potential: Consider Globe’s initiatives to enhance internet infrastructure and its rollout of 5G technology.
• Dividend Yield: Examine Globe’s payout record and contrast it with other telecommunications firms.
• Management: Evaluate the background and performance of the leadership group.
• Competitive Analysis: Examine how Globe stacks up against rivals like PLDT.
• Economic Indicators: Examine how the Globe is impacted by economic variables such as GDP growth and telecommunications-related government regulations.
• Technical Analysis: Examine Globe’s stock price patterns using stock charts.
• Risk assessment: Determine Globe’s risks, such as competition in the market and changes in regulations, and assess Globe’s risk management strategy.

A multi-award-winning blogger and advocate for OFWs and investment literacy; recipient of the Mass Media Advocacy Award, Philippine Expat Blog Award, and Most Outstanding Balikbayan Award. Her first book, The Global Filipino Bloggers OFW Edition, was launched at the Philippine Embassy in Kuwait. A certified Registered Financial Planner of the Philippines specializing in the Stock Market. A recognized author of the National Book Development Board of the Philippines. Co-founder of Teachers Specialist Organization in Kuwait (TSOK) and Filipino Bloggers in Kuwait (FBK). An international member of writing and poetry. Published more than 10 books.  Read more: About DiaryNiGracia