Perhaps some of you may worked out a better tool based on this.
Humans (at least in my case) find it easier to comprehend pictures than numbers. I guess that's because our brains are developed that way.
So, why not use pictures to find the value of shares rather than numbers?
Specially, when it comes to compare different investment options available (buy shares Vs put in an FD), I find it very handy to use pictures (Graphs).
This tool is based on formulas discussed in couple of other posts. There were discussions on calculations used; lot of experienced members contributed a lot with their inputs (My thanks to all of them).
The idea of this post is to explaining how I interpret the pictures in the tool. (I like to use it like a dashboard in a vehicle.)
The links to other related topics are;
The best name I can think of for this is 'Net Present Equity Value Projection' (NPEV projection).
Parameters used in calculations are
1. Book value (NAVPS)
2. Earnings - EPS
3. Dividends - DPS
(In future, we may consider using EPS.DPS deviation and business growth rate)
The tool, for the time being, shows a 'snapshot value' of a share, so the (future) growth rates are ignored.
***** Repeat: Please note this is not a forecast of the future value (or market price) of a share; just a representation of 'status quo' (current status).
To grasp the idea easily, I have shown below the NPEV projection of 5 simple hypothetical shares. The name of each share tells its EPS and DPS.
All are having a NAVPS= Rs 100.
Here is the picture.
Y-Axis represent the value in Rs. X-Axis represent the years projected in to the future.
The discounting rate (say the FD rate) considered is 12% per annum.
12EPS 12DPS is the same as keeping money in a compounding FD @12%.
The relative position of other graphs show (under 0% business growth) the value of investing in that share compared to keep in the FD.
I use the following picture to explain how to interpret the graph to compare EPS and DPS.
At Year 1, if the graph is extended with a positive gradient (going above the horizontal line), that means the share is earning more than 12% (w.r.t. book value). In other words, the business is performing
better than FD rates.
If the graph is extended with a negative gradient, we should have our own good reason to in vest in the share; otherwise it may not make sense.
The right hand end of the graph tell us bout the dividend payout of the share. If the graph is above the year-0 level, that means the dividend rate is above FD rate (w.r.t. book value).
Above scenarios are straight forward but the tool becomes handy to view the mixed performances. For example if the earning rate is higher but the dividend rate is lower.
For example; in case of share- 20EPS 4DPS, the graph shows, to beat the FD rates, the share has to adjust its dividend rates OR there has to be a business expansion (or revaluation of Assets) within nex 10 years, in order to be more attractive than the FD rates.
Following are few real share examples;
TWOD: According to the graph, it has a high NAVPS, however EPS and DPS are not attractive. The graph suggests, if the business continues like this, the value may fall below Rs 3/-.
SCAP and VLL:
SCAP cannot continue business like that.
VLL: The dividends given in recent past cannot be continued with the current earnings.
GLAS: Looks far better than others in the same price range
NEST: It seems almost all earnings are given as dividends. DPS may continue as it is with present EPS (not much growth though)
UML: Should worth more than Rs 130/-
TJL: Looks like another cash cow like NEST.
Please share your views. I appreciate them a lot.