Last week, we mentioned using Price Earning Ratio to choose stocks; this week, let us take a look at the Quarterly Earning Growth, understanding how it is being calculated, the behavior of the earning growth, and some case studies.
Quarterly Earning Growth:
Quarterly Earning Growth is the comparison of the Earning Per Share between the latest quarterly EPS and the same quarterly EPS in the preceding financial year. This way, it shows whether the company is performing better in terms of earning comparing to last year's same quarter. If the Earning growth is negative, it means that the company is making less earning per share, or even a loss.
Seasonal:
The reason of calculating the Quarterly Earning Growth by comparing the current quarterly earning per share (EPS) with the preceding year quarterly EPS, is because most companies business are seasonal. For example, due to the year end and festive holidays, a retail company usually make more profit in the later part of the year than any other months of the year. Therefore, to find out whether this company profit performance is best to company the quarterly earning with the preceding year quarterly earning.
Standard in Quarterly Earning Growth:
It is insufficient to just study only the latest quarterly result. To understand a company's financial, one must analyze and compare the results by every quarter; thus understanding the company's earning behavior.
Some investors might ask, who much Growth is considered a good growth of Quarterly Earning? In reality, there is no standing in which what figure is the best. Analyzing the Earning growth should go with the price trend. If price is still moving on an uptrend, with the earning growth improving, that is usually a better time to invest. Contrary, when price is moving sideways or downtrend, negative earning growth will actually further dampen investors confidence. Nevertheless, investors should know that price usually move a head of any results (3 to 6 months ahead). Therefore, technical analysis is imperative to professional investors.
There is no perfect formula nor indicators in both Technical and Fundamental analysis. Investors who are lack of experienced generally like to know about a best indicator, the fastest, and the most accurate indicator to help them to pick stocks. Analysis should be well-rounded in many aspects, and therefore, no one should rely on any single indicator (be it PER, Dividend yield, or Earning Growth) in making any investment; and by understanding the behavior of the earning growth, investors shall have a better attitude in approaching different types of companies, and finally, entering a trade at the right timing with technical analysis.
Below are the Case Studies, by taking Earning Growth in to account.
Carotec
Figure 1:Carotec – 0076，Quarterly Ratio Table
As indicated by the A square, Carotec had a negative Earning growth started in the 30thof September, 2007, this indicates that the company earning per share is reduced. Then, the Earning Growth was -572% on the 30thof September, 2008, this indicates that the company is actually making losses. At the same time, price dropped severely (as indicated by B square). By understanding the behavior of the Quarterly earning growth, investors should decide what type of trading / investing strategy for this kind of counter: short term. However, this is kind of quarterly earning growth is not favorable to conservative investors.
Airasia
Figure 2: Airasia – 5099，Quarterly Ratio Table
As indicated by A, Airasia's quarterly earning growth was -359.21% on the 30thof September, 2008, this shows that the company is actually making losses. However, other than the two quarters of losses, most of the time, Airasia is making a profit. Nevertheless, due to the inconsistency of earning growth, price of Airasia also fluctuates highly as indicated by the B square.
Haio
Table 3: Haio – 7668，Quarterly Ratio Table.
As indicated by A square, Haio's Quarterly earning growth has been very consistent, with only some declined in the earning growth in the recent quarters. In other words, the company is making constant profit, thus this is more suitable for long term investors.
BAT
Figure 4: BAT – 4162，Quarterly Ratio Table
As indicated by A square, other than occasional declined in quarter earning growths, BAT is making consistent profit. In other words, BAT is making profit in every quarter and this is a fundamentally strong counter, thus the average fluctuate price is around RM 42. Due to the lower fluctuation of price, it is more suitable for long term and conservative investors.
Conclusion:
Price Earning Ratios, Dividend Yield, Earning Growth, etc, are important financial figures and ratio to understand the company's back ground. By understanding its back ground, investors will know whether this company is suitable for the type of investing strategy (long term or short term). With proper trading skills of Technical analysis, investors can pick the best timing for company suitable to their investing style.
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