Do we keep target price, Can increase in share price create issues, how long growth history to prefer, Diluted EPS or Cash EPS

Modified on July 15, 2018

The current article in this series provides responses related to the following queries:

  • Do we keep target prices for stocks?
  • Can an increase in the share price create issues for lenders?
  • At how many years of growth should one focus?
  • Should one take 10 years growth in all cases?
  • Which EPS should one use: Diluted EPS or Cash EPS?

 

Do we keep target prices for stocks?

Hi Dr,

I have some questions regarding the stock shortlisting. It will be great if you can help in this.

  1. So, once after you shortlist some stocks, do you set any target price for buying the shortlisted stock?

I highly appreciate your work and I would like to know your opinion on these things.

Regards,

Author’s Response:

Hi,

Thanks for writing to us! We are happy that you have found our work useful!

1) So, once after you shortlist some stocks, do you set any target price for buying the shortlisted stock?

We do not keep target prices for stocks. This is due to following reasons:

a) Stocks have the habit of not responding even to good business performance for years altogether and

b) When good stocks rise on recognition by the markets, then there is no limit to what extent they may rise.

Therefore, we choose to invest in stocks, which we feel are fundamentally good and stay with them without any return expectations.

Further advised reading: When to Sell a Stock?

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

 Can an increase in the share price create issues for lenders?

Hello Sir,

There is an important doubt.

On what grounds can a company give such comments that due to the share price rise they are unable to settle their debts?

Kindly go through the attached image:

_Do we keep target prices of stocks, Can increase in the share price create issues, how to monitor, Diluted EPS or Cash EPS

Author’s response:

Hi,

Thanks for writing to us! We are happy to see that you are doing your own equity analysis and spending time and effort.

In the cited case, the argument of the company seems a bit difficult to understand and the best course of action would be to ask the company directly due to following reasons.

The share price can affect the settlement with the banks primarily two circumstances:

  1. When banks have given a loan against shares, then with share price decline the banks will ask more shares as collateral/security.
  2. When banks are planning to convert their loan into the equity/shares of the company, then the decline in share price will lead to the banks asking for more shares for converting the same amount of loan.

In both the above situations, there might be a dispute between the company and the banks:

1) If the share price declines and the company is not willing to give more number of shares to banks.

OR

2) If the share price undergoes short-term increase and the company asks banks to reduce the number of shares asked by them citing the recent increase in price.

However, it is unusual for banks to have an issue if the share price increases in the short term and the company does not reduce the number of shares to be provided to the bank. In fact, it seems that if the banks are getting the earlier agreed number of shares, then actually banks should be happy if the share price increases. This is because, in such a case, the increase in share price will lead to the higher value of security/collateral in case (1) above and will lead to capital gains in case (2) above.

Therefore, we believe that investors may ask the company directly the reasons why share price increase will create issues with the banks.

Further advised reading: Why Management Assessment is the Most Critical Factor in Stock Investing?

All the best for your investing journey!

Regards

Dr. Vijay Malik

At how many years of growth should one focus?

Which EPS should one use: Diluted EPS or Cash EPS?

Dear Dr Vijay Malik

Could you please help with the following questions?

  1. Does consistent earnings growth mean for 10 years / 5 years?
  2. Which earning is recommended to use Diluted EPS or Cash EPS?

 

Thanks,

Author’s Response:

Hi,

Thanks for writing to us!

1) Does consistent earnings growth mean for 10 years / 5 years?

We agree that investors should prefer analysing the growth patterns of the company over long periods (in this case 10 years) because then investors are able to observe the performance of the company at least over one complete business cycle.

Further advised reading: Finding Self Sustainable Growth Rate (SSGR): a measure of Inherent Growth Potential ofa Company

2) Which earning is recommended to use Diluted EPS or Cash EPS?

Out of diluted and cash EPS, we prefer to use diluted EPS. This is because, in the case of cash EPS, investors tend to add back the depreciation. Adding back the depreciation inflates the profits. This is because, depreciation is recognition of those expenses, which the company had incurred previously to create fixed assets but it did not deduct them from P&L due to capitalization. Therefore, depreciation is a mere postponement of expenses from one financial year (when fixed assets were created) to another financial year (when depreciation is recognized). Therefore, investors should deduct depreciation in the analysis of earnings.

Therefore, we prefer diluted EPS to cash EPS.

Further advised reading: How to do Financial Analysis of Companies

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Follow-up Query: Should one take 10 years growth in all cases?

Dear Dr Vijay Malik

Is 10-year growth a good measure? It might happen that a bull market lasts for 10 years. In this case, we are missing out the performance of companies during bear markets. Is it right?

In addition, how should one analyse the companies that are on the verge of turnarounds?

Thanks,

Author’s Response:

Hi,

Thanks for writing to us!

You would appreciate that the general rules are for guidance. In specific cases like the one mentioned by you for a bull market for 10 years, the investors may adjust their analysis accordingly.

We do not focus on turnarounds; therefore, we are not the best person to guide you on this matter.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

"Peaceful Investing": My Stock Investing Approach

“Peaceful Investing” approach is the result of my more than a decade of experience in equity markets. This approach helped me invest even when I had a full-time corporate job and could not spare a lot of time for stock analysis. During my investing journey, I have faced all the common challenges of the investors, the biggest one being “scarcity of time”. “Peaceful Investing” approach keeps in mind that an investor will have limited amount of time to spare for stock investing. 

The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices rise, then the investor is happy as she is now wealthier. On the contrary, if the stock prices fall, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

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