Some Aspects Concerning the Analysis of Stock Performance of Companies Listed on Stock Market

Transcription

1 Economy Transdisciplinarity Cognition Vol. XIV, Issue 1/ Some Aspects Concerning the Analysis of Stock Performance of Companies Listed on Stock Market DANIELA CRISTINA SOLOMON Vasile Alecsandri University of Bacău Bacău, Romania MIRCEA MUNTEAN Vasile Alecsandri University of Bacău Bacău, Romania Abstract Stock performance analysis of a company listed on stock exchange represents a particular type of analysis involving a further study conducted on the basis of stock data, which should not miss from the annual financial statements, being intended to serve at elucidation of some aspects of title portfolio policy area: if you need to buy, sell or preserve titles; if the amount in question is a satisfactory return as a title portfolio or, conversely, one of speculation, in which profitability is sacrificed in favour of capital gains, as well as what is the actual state of the shares and their development. Keywords performance, financial analysis, stock indicators INTRODUCTION In recent years investors have made significant gains on Romanian stock market relying on those few companies that instead of paying regular dividends have capitalized profits by including them in the social capital. In this way the company had disposed from the necessary financial resources to develop business and investors were pleased because the raising of capital brought them free shares which they could then sell on stock at favourable prices. In addition, these companies share prices have met a significant upward trend because the investments made by incorporating profits brought the desired results. If gain is represented for most economies by interest paid for set term bank deposits or bonds purchased and held for a longer period of time, in the case of investment earning is presented under several forms. A stock placement, when is done inspired, it can bring significant and varied gains for investor, including [1]: dividends- annual paid by companies where is a shareholder, increase of the price market for held shares, free new shares received as a result of capital increases made by these companies through the incorporation of profits accumulated over many years, subscription rights allocated from the cash capital increases made by the same companies, to more favourable issue prices than those currently on the market. For enterprises listed on the stock exchange, shareholders are primarily interested in increasing the shares stock rate. Thus, the stock rate gets to express the barometer of overall performance [2] of the listed company, its development being decisively influenced by: relationship between offer and demand on capital market; the evolution of economic-financial performance of the enterprise;

2 investor expectations regarding business development opportunities; evolution and prospects of the activity sector in which company operates; national and international economic trends. Stock rate level and variation influences increasingly or decreasingly the market capitalization of the company, which is equivalent, as appropriate, with an improvement of a deterioration in overall performance. Market capitalization (Cb) depends on the evolution of shares number composing the capital of an enterprise (Na) and the evolution of stock market rate of a share (Ca): Cb= Na Ca Market capitalization expresses the value that stock exchange gives to company and allows the company assessment based on stock value of its shares, highlighting the evaluation price of operators, knowing that one of the functions of financial markets is therefore granting a price to quoted companies. Analyzed companies are listed on the Bucharest Stock Exchange (BSE) as small companies, with relatively low market capitalization level as the analysis of data presented in Table 1 shows. Table 1 Course and stock market capitalization Indicators Number of issued and outstanding ordinary shares (Na) ALFA: BETA: Stock rate of a share ALFA: Maxim Minim 5 7,5 11, The last rate of a listed share (Ca) BETA: Maxim , ,5 Minim , The last rate of a listed share (Ca) Market capitalization (Cb) Cb = Na Ca ALFA Deviations BETA Deviations In the case of two analyzed companies the stock market presents an upward trend in , and in 2008, amid the global economic crisis that affected inclusive the stock market in Romania, the stock market falls sharply, aspect that influences unfavourably the market capitalization evolution, which follows a similar evolution to stock rate. The number of shares composing the capital of both companies does not support significant changes, if S.C. ALFA S.A. maintains in the analyzed period at shares, in the case of S.C. BETA S.A. it increases slightly, respectively by 128 shares from shares in 2007 to shares in Graphical representation of the evolution in stock rate is shown in Figure 1 for S.C. ALFA S.A. and in Figure 2 for S.C. BETA S.A.

3 Figure 1 Stock rate evolution for S.C. ALFA S.A. Figure 2 Stock rate evolution for S.C. BETA S.A. Source: Bucharest Stock Exchange, accessed in December 2009 Stock analysis requires the correlated calculation and interpretation of the most important traditional efficiency indicators (return rates, leverage, liquidity and solvency) and of the main stock indicators. Stock indicators give the synthetic expression of performance for quoted companies, because they contain information about the stock rate and financial accounting information about exercise s net result, dividend per share, accountancy value of a share etc. Depending on manner of expression, stock indicators can be grouped as following [2]: stock indicators on share level; stock rates or market multiples, calculated based on stock course and stock indicators on share level. STOCK INDICATORS ON SHARE LEVEL On national and international level the following stock indicators at share level are used: profit per share, sales per share, dividends per share, self-financing capacity per share, per share equity or net assets per share. Table 2 Stock indicators on share level Stock indicators Significance Symbol Calculation formula 1. Earnings per Share Represents the plus value that company generates during a financial exercise for each of its shares. Reflects the net returns on ordinary share level. Expresses the value of afferent shares sale and is 2. Sales per share equivalent to productivity per share [3]. 3. Dividend per share 4. Self-financing capacity per share Expresses short-term profitability of shares, followed with priority by minority investors. Indicates the self-financing capacity part (CAF) brought by each share. EPS SPS DPS CAFa Total net profit EPS Total share number Turnover SPS Total share number Distributed diividends DPS Total share number Self financing capacity CAFa Total share number

4 Stock indicators Significance Symbol Calculation formula 5. Equity per share or net assets per share Estimates the accountancy value of a share. If the own capitals value represents the wealth of all shareholders, the accountancy value per share is equivalent of a single share [1]. Cpra Own capitals Cpra Total share number Earnings per share (EPS) represent the theoretical value that will be accrued to a share holder if we assume that the issuing company should distribute all profits towards shareholders without saving anything for investment and capital reserves and shows current and future growth potential of the company providing information for majority shareholders interested in long-term profitability, while influencing the level and trend of exchange rates (PER). Calculation of stock indicators on share level in the case of the two analyzed firms is shown in Table no. 3. Table no. 3 Calculation of stock indicators on share level Indicators Net result ALFA BETA Number of ordinary shares issued and outstanding ALFA: BETA: Turnover ALFA: BETA: Distributed dividends ALFA: BETA: Self-financing capacity ALFA: BETA: Equity ALFA: BETA: The last course of rated action ALFA: BETA: Equity per share EPS (1/2) ALFA: BETA: Sales per share SPS (3/2) ALFA: BETA: Dividends per share DPS (4/2) ALFA BETA Self-financing capacity per share (CAFa) (5/2) ALFA BETA Eqyuity per share or net assets per share (Cpra) (6/2) ALFA BETA From their analysis the following aspects are noticed: In the case of S.C. ALFA S.A. stock indicators on share level have evolved differently: earnings per share (EPS) recorded a downward trend in period (fall from lei/per share to lei/share) then increased in 2007 to lei/share and in 2008 reached the maximum level of lei/share due to an increase of performance indicator net profit; sales per share (SPS) have

5 decreased from lei/share to lei/per share as a direct consequence of the reduction in sales volume; self-financing capacity per share (SFCPS) and equity per share (EPS) increased due to increase of self-financing and equity capacity. Number of shares issued and outstanding remained constant throughout the analyzed period, at a value of shares, that is why have a null influence on the development of stock market indicators at share level. The low level of dividends per share may be considered as a favorable signal to steer funds to various development projects, so a good time to purchase those shares. In the case of S.C. BETA S.A. company, the positive trend of sales per share indicator (increased from lei/per share in 2004 to lei/per share in 2008) as for profit per share (increased from lei/per share in 2004 to lei/share in 2008) reflects a healthy growth, increasing sales and, thereby, improving of the financial situation, so a clear sign of development activity. Self-financing capacity per share reaches its maximum value in 2006, that of lei/per share, to decrease in 2007 to lei/per share and to increase in 2008 to lei/per share, due to favorable gap between the growth of self-financing capacity, superior to growth rhythm of issued number of shares. Equity per share (EPS) follows an upward trend during the analyzed period ranging from 6.38 lei/per share in 2004 to lei/per share in The increase in book value of shares was due to equity value increase (from in 2004 to lei in 2008) in a superior growth rhythm of issued number of shares. Lack of dividends per share for the past 3 years makes the company s shares to become less attractive to investors interested in short-term profitability of actions seeking safe and immediate earnings. Lack of dividends distributed is not a consequence of the lack of profit but to their distribution to different destinations, S.C. BETA S.A. opted to keep the entire net profit of the enterprise disposal as its own source of funding for the continuation of various ongoing in development projects, namely for reinvestment. Thus, the capitalization of net income means that shareholders gave up their dividends with the hope of higher future earnings. STOCK RATES OR MARKET MULTIPLES On national and international level the following stock rates or stock market multiples are used: rate price per share / earnings per share or ratio of market capitalization, price rate on accountancy value of a share, dividend return, dividend distribution rate, the rate of price on sales revenue per share (or degree of market assessment), efficiency gains, stock liquidity. Significance and determination relationship of indicators is presented in Table 4. Table 4 Stock rates or stock market multiples Stock indicator Significance Symbol Calculation formula 1. Price Earnings Ratio or Market Capitalization Coefficient Establishes the connection between title and return signifying: - price investors are willing to pay in exchange for units of net profit per share, or - number of years needed to recover the investment, if all the company s profit would fully be distributed to shareholders as dividends. PER Share rate PER EPS Stock market capitaliza tion PER Net result

6 Stock indicator Significance Symbol Calculation formula 2. Price to Book Value Provides a reference on how expensive or how cheap a share is. Expresses the coverage ratio of book value of a share on behalf of its price, providing information on undervalued or overvalued shares. 3. Dividend Yield Characterizes the placement s effectiveness in a certain company s shares, measured on received dividends. 4. Pay Out Ratio Expresses the policy regarding dividends distribution, providing information for those interested in acquisition of shares in order to obtain income under the form of dividends or to make plus value capital [3]. 5. Price-To-Sales Reflects how market quotes Ratio or Market the company s turnover or, Evaluation Degree in other words, how much to buy its turnover on the 6. Earnings Yield [5] or PER reversed capital market. Expressed placement s profitability and depends on the profit s size, on profit sharing rates and on the level of stock course of action. 7. Marketability Represents the weight of traded shares over a period of total issued and outstanding shares. P/BV DIVY Share' s course P / BV Own capital per share or Stock market capitaliza tion P / BV Own capitals DPS DIVY 100 Share' s course Distributed dividends DIVY 100 Stock market capitaliza tion Distributed dividends POR POR 100 Net result P/S Share' s course P / S SPS Stock market capitaliza tion P / S Turnover EPS 1 EY EY Share' s course PER La Number of traded shares La 100 Total number of issued shares The most commonly used stock market indicator is the rate price earnings ratio (PER) which can be calculated on three different moments: on the basis of the preceding financial year - anterior PER; based on current data - current PER; based on projected data - future (projected) PER. If among investors, PER is one of the best known stock market indicators, according to brokers, it is not always relevant in making investment decisions on stock exchange, because they appreciate that investors buy in particular the company s growth rhythm and less the profit of last year. Many investors are not based on the PER level when taking the investment decision, but rather on the business increase rate of the concerned company. PER is a less relevant indicator for an economy with a growth rate of 8% as Romania has (Adrian Simionescu, director broking company Finance Securities) [6]. In this situation, PER indicator loses its importance and the value to which investors report to is net assets per share. In some economic sectors a price / accountancy value report of 2, 3 or higher is considered normal while for others only a lower level of two is acceptable. Used exclusively, this indicator is not that relevant. Based on data from Table no. 3, on information in the income statement of the two studied companies listed on BSE and statistical studies [6], the exchange rates are determined as shown in Table no 5.

7 Table no. 5 Calculation of exchange rates Indicators Number of traded shares (Natr) ALFA BETA Financial return on equity (Rf = Rnet/C) ALFA 7.98% 6.55% 3.02% 5.26% 21.71% BETA 58.71% 38.51% 32.58% 28.17% 24.84% 3. The rate of price/earnings per share or stock exchange capitalization ratio (PER=Ca/EPS or PER =Cb/Rnet) ALFA BETA PER market The rate price per book value of a share (P/BV = Ca/Cpra or P/BV = Cb/C) ALFA BETA P/BVmarket Dividends Yield (DIVY = DPS/ Ca or DIVY = Div/Cb) ALFA 2.937% 1.496% 1.088% 0.539% 0.001% BETA % 11% DIVY market 1.45% 0.94% 1.72% 2.18% 8.57% 6. Dividends distribution rate (POR = Div/Rnet) ALFA 23.23% 21.90% 59.18% 38.76% 0.01% BETA 58.76% 68.83% 0% 0% 0% 7. The rate price per sale on share revenue (P/S = Ca/SPS or P/S = Cb/CA) ALFA BETA Yield gains or Inverse PER (EY) ALFA 12.64% 6.83% 1.84% 1.39% 9.73% BETA 26.74% 15.98% 12.55% 6.86% 14% 9. Liquidity of shares (La = Natr/Na) ALFA 15% 21% 23% 27% 17% BETA 16% 22.50% 21% 20.50% 18.75% Market capitalization coefficient or ratio price per share/earnings per share (PER) increased in period for the two companies as a result of the favorable gap between the growth rhythm of share course, superior to profit per share course, which constituted a sale reason for the short-term shares. In the case of S.C. ALFA S.A. indicator s changes were more pronounced and, increased therefore from 7.91 in 2004 to in 2007 and then fell to in For S.C. BETA S.A. we notice a lower value of PER s (between 3.74 and 14.58) it increased from 3.74 in 2004 to in 2007 as in 2008 to reduce to the level of Although in 2008 the PER indicator is declining, it follows the downward trend of stock market situating altogether above the average market (market PER) which is The decrease of market capitalization coefficient in 2008 was on one side the consequence of the decrease of stock exchange rate per share and of the increase of profit per share and on the other hand the decline in market capitalization and net income growth. If among the investors, the PER indicator is one of the best known stock market indicators, according to brokers, it is not always relevant in making investment decision on the stock market as investors buy especially the company s growth rhythm and less the profit for the last year. Many investors do not rely on the PER level when making investment decision, but rather on the company s business growth rate target. PER is a less relevant indicator for an economy with a growth rate of 8% as Romania s (Adrian Simionescu, director of broking company Finans Securities) [7]. In this situation, the PER indicator loses importance, and the value to which investors are reporting to is net assets per share.

8 Graphical representation of the comparative evolution of the market capitalization coefficient (PER) is suggestive shown in Figure no PER - S.C. ALFA PER - S.C. BETA PER piață Figure no. 3 Evolution of market capitalization coefficient (Price Earnings Ratio - PER) Correlated analysis of the price book value ratio of a share (Price to Book Value, P / BV) and financial rate of return (Rf) reflects improved efficiency in capital during the last year to the level of 21.71% for ALFA company and 24.84% for BETA society. Over-unit value of P / BV s, above average market level (during the last two years), increases the risk associated to share in the two companies, giving it a lack of attractiveness, which means an increasing risk in the event of liquidation or bankruptcy. ALFA shares company were overvalued because of high levels of the price book value ratio of a share in 2007 (3.79) that corresponds to a reduced amount of earnings to shareholders, and the high level of PER s in was not supported by concordant economic results, the risk has therefore increased and the attractiveness of shares decreases accordingly. In some economic sectors a price/book value ratio of 2, 3 or higher is considered normal, while in others only a lower level of two is acceptable. Used exclusively this indicator is not as relevant. Graphical representation of comparative evolution of financial rate of return (Rf) and ratio price book value of a share (P/BV) is suggestive shown for S.C. ALFA S.A. in Figure no. 4 and for S.C. BETA S.A. in Figure no Rf - S.C. ALFA P/BV - S.C. ALFA P/BV piață Rf - S.C. BETA P/BV - S.C. BETA P/BV piață Figure no. 4 The evolution of ratio price per book value of a share for S.C. ALFA S.A. (P/BV) Figure no. 5 The evolution of ratio price per book value of a share for S.C. BETA S.A. ( P/BV) Decrease in dividends per share under the condition of share stock exchange growth diminished dividend yield (DIVY) for the two companies, which can also be explained by decreasing the amount of distributed dividends and market capitalization growth.

9 The dividends distribution rate (DDR) reached the maximum level of 59.18% (in 2006) for S.C. ALFA SA, and 68.83% (in 2005) for S.C. BETA S.A. The non-granting dividend policy during the last three years for S.C. BETA S.A. company leads to a zero rate of dividends (POR = 0%), the company opting for the capitalization of profits in the hope of obtaining a plus in value. The degree of market assessment or ratio price per share on sales revenue (P/S) follows an upward trend during In comparison, for ALFA firm a lower value of the indicator is noticed (between and 1.767) as compared to BETA firm (between and 4.997). The increasing values and over-unit ones constitute attractive conditions for investors. In 2008 we notice the reduction of market evaluation for both companies, but its value remains over-unit. Earnings yield (EY), in inverse relation to the PER, has declined in period for ALFA company from 12.64% (in 2004) to 1.39% (in 2007), and for BETA firm from 26.74% (in 2004) to 6.86% (in 2007) being the direct consequence of share course growth faster than profit growth per share. Net income increase and decrease in market capitalization in 2008 had the effect of increasing the efficiency gains to 9.73% (for ALFA company) and 14% (for BETA firm). In the case of S.C. ALFA S.A. liquidity shares (Ls) increased from 15% in 2004 to 27% in 2007 when it reaches the maximum level, and in 2008 drops to 17%. It is noticed that liquidity of shares for S.C. BETA S.A. firm recorded maximum level in 2005 with 22.5% followed by a downward trend in 2008 reaching 18.75%. Graphically, the evolution of liquidity shares is shown in figure no. 6 30% 25% 20% 15% La - S.C. ALFA La - S.C. BETA 10% 5% 0% Figure no. 6 Evolution of liquidity share (Marketability- La) CONCLUSIONS The conclusions of the comparative analysis of the two companies listed on the Bucharest Stock Exchange reflect the fact that there is no strong correlation between economic-financial results and stock market indicators; the buying-selling process of shares indicators of economic-financial shares has low information power. The assessment of a listed company's stock performance require related analysis of stock indicators and the traditional economic-financial ones, thus providing the investor first information that helps him forming a scientifically founded opinion on the company s activity, whose titles are a potential destination of its financial availabilities. References [1] Valceanu, G., Robu, V., Georgescu, N., Economic-Financial Analysis, Economic Publishing House, Bucharest, 2004.

10 Supplementary Recommended Readings [1] Bucharest Stock Exchange, Investor's Guide, p. 37, available on accessed in September [2] Petrescu, S., Analiza si diagnostic financiar - contabil (ghid teoretico-aplicativ, ed3., Editura CECCAR, Bucharest, [3] Bucharest Stock Exchange, Investor's Guide, p. 47, available on accessed in May2009. [4] Quiry, P., Le Fur, Y., Pierre Vernimmen, Finance d entreprise 2009, 7 th edition, Dalloz Publisher, Paris, [5] Bucharest Sock Exchange, Statistics, on accessed in May [6] Financial Newspaper, Romanian shares appear expensive relative to made profits, but earnings are growing rapidly, April 12, 2007, report-with-profits-to-earnings-but-growing fast