Evaluating a stock

CEBU, Philippines - To assess the value of a stock, an investor must understand the fundamental analysis called the price-to-earnings ratio.

Stock analyst Norman Jay Go of BPI Securities Corporation said retail investors have to be aware of the worth of listed companies to better assess their performance.

"This is the statistics (the gauge) we use to determine the value of companies and industries," he explained in a recent discussion with reporters.

The P/E is a valuation ratio that divides the market price per share by earnings per share or, in other words, the market capitalization is divided by net income.

Take for instance a company with a share price of P30 and earnings per share of P3. The P/E ratio of this certain company is 10 which is computed by dividing the share price over EPS.

"The lower the P/E, the cheaper the company. While the higher the P/E, the more expensive the company," he said, explaining the investing public is willing to pay for such high-valued stock many times mainly for its earnings.

Stocks with higher P/E ratio are believed to have profitable condition in the long-term as more revenues are being generated by these companies.

Go pointed out that back in 2010, corporate earnings outstripped price as businesses were just recovering from the global recession.

And the said event has maintained until now on the back of the growing interest and confidence on the Philippine economy and the local bourse.

"The Philippines is the bright spot growth among the rest of the world mainly because of the so-called demographic sweet spot," he noted.

A lot of interest is flowing into the market and that the Philippine Stock Exchange index, the indicator of the local bourse's performance, will likely hit a new record high due to strong momentum of economic growth and higher earnings of listed companies. (FREEMAN)