If you read this column last month you’ll recall that we had determined
that the importance of the current share price is its relation to the
price at which you bought your shares. That understanding leads
inexorably to this month’s question, “How do you figure out if it is a
good time to buy?” And, recalling that I am not a serious ‘numbers’
guy, it’s about this point that I call in my friend and economist Dr.
Bruce…
Bruce explains that in order to make any sense of a stock’s current
price we have to understand what’s behind the ‘price per share’, and to
do that the DSE can help us out. The table below is one of many of the
tools they provide on their website: (www.darstockexchange.com/list_comprofile.asp)]
 Listed Company Ratios as at 31March 2004
These charts can be a little confusing, so let’s do the easy stuff
first. We’ll start with the column titled DPS, or Dividend per Share.
Remember that dividends reflect a company’s decision to return a
portion of their annual profit to the shareholders. According to the
chart above, Tanzania Tea Packers (TATEPA) is paying dividends of 40.00
shillings per share. So, if you held 1000 TATEPA shares, you would
receive a check in the amount of 40,000 as your dividend for the year.
We can also see that 40,000 TShs is equivalent to 7% of the total value
of those shares (that is shown in the column D.Yield which stands for
‘Dividend Yield’).
But now we have to look a little deeper. The
Earnings Per Share (EPS) column tells us how much total profit the
company made for every share it has on the market, and ‘profit’ is
generally a pretty good measure of yearly growth. Remember that profit
can be returned to the investors as a dividend or it can be retained to
reinvest in the business and fuel additional corporate growth. In other
words, a company that returns all its profit to the investors might be
sending out some pretty healthy checks, but you might ask how it plans
to sustain its growth. If it gives all its earning back to the
investors, what’s left to help it grow?
Which brings us to an important
point: the main reason to study the numbers is so that we can ask hard
questions before we hand our money out. While the numbers will rarely
come straight out and tell us anything themselves, they can provide us
some good clues. For example, take a look at the numbers in the chart
again and try comparing the dividends paid per share to what the
companies actually earned (do this by dividing the number in the DPS
column by the number in the EPS column). The result of that calculation
shows you the percentage of total profit they actually paid out. In
most mature markets, the percentage of earnings provided as dividends
is less than 50%. In cases where you find it in excess of 50% (or in
excess of 100%!) you may ask yourself, ‘now why did they do that?’
Another good question to ask yourself before investing in a stock is
‘how long can the company keep on doing that?’
Michael Gehron
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