16/05/2012 02:27 PM
Major factors that affect and predict stock price : case of PPWSA share
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When you wish to invest in the stock market, you should always make a good understand of the whole market such as the company’s performance and matter facts that affect your investment. As you know that you cannot predict the stock market, so in that case you need to know the functioning of the market.
In stock market, the price evaluation is one of the most important tasks; the analysis of stock prices based on the mainly corporate valuation because the method that can consider the stock price, are from many angles such as the profitability, assets, market price and factors around it.
Besides the analysis for the long-term investment above, the analysis for the short-term investment is also very important that depends on the business performance of the company at current time, and the price could be unstable (go up and down).
There are some major factors that affect and predict stock price. So let us discuss about many factors affecting the stock price in this analysis.
1. Demand and Supply
One of the major factors affecting stock price is demand and supply. The trend of the stock market trading directly affects the price. When people are buying more than selling the shares, then the price of that particular stock increases. On the other hand, if people are selling more than buying stocks, then the price of that stock will be falling down.
Cambodia Securities Exchange (CSX) has just launched its official trading about three or four weeks ago with the only one listed company of Phnom Penh Water Supply Authority (PPWSA). To measure the liquidity and price of the shares of the PPWSA within the CSX, a comparison has been made to our neighbor and the recent formed Securities Exchange, Laos Securities Exchange (LSX). The volume of traded shares of PPWSA at CSX is compared to the volume of traded shares of EDL, electricity authority in Laos Stock Exchange (LSX).
In the first three weeks of its respective trading period, PPWSA stock appeared to be more liquid, which means there were more activities in the Cambodia Securities Exchange (CSX) than in the Laos Securities Exchange (LSX). The average daily trading volume of PPWSA is 225,765 shares which is 1.923% of the free float shares, while the average daily trading volume of EDL is 204,902 shares equivalent to only 0.099% of the free float shares.
However, the trading volume of PPWSA was not significant compare to a consensus take hold in the overall developed markets, there must be huge volume at least 10% higher. So when average daily trading is high, the stock can be easily traded and has high liquidity.
2. Stock Price / Book value (P/B ratio)
The investors should not invest in a company with P/B higher than 2.5 times, but it’s exception for any new market. For example, at the beginning period of stock exchange in Vietnamese market, P/B ratio was 10-17 times due to the high demand and sentiment of the market.
Currently, P/B of PPWSA is around 1 times (Current book value based on my calculation team is around 6300 to 6,500 Riels ended 2011), this is a very small ratio that investors shall make potential investment with this company. Often, for every new market like this, the stock price should be at least 2, 3 or 5 times.
3. Stock Price/Earning per share (P/E ratio)
This ratio shows the level of stock prices is attractive or not to the investors. Often, when the company is attractive to the investors to make investment, then the price will go up with the same time it will be increased P/E ratio. Likewise, the investors should not be surfing to focus only on P/E ratio, as this makes them not daring to buy stocks with a high P/E, and they will miss the opportunity to get profit from the blue-chips stock.
In Vietnam during the hot growth (From 2006 to 2008) there were many listed companies reaching P/E at 25-60 times.
Currently, we cannot compare the P/E ratio of PPWSA with others firm in the region because Cambodia is a new market, and the PPWSA share is very attractive to both local and foreign investors since the IPO stage, so high P/E ratio for PPWSA share is significant.
4. Annual Earnings Per Share of growth (EPS Growth)
This is an important ratio, if the EPS annual growth rate of 15% or more, the stock price likely to rise very sharply in the near future. With the new project of the NIROTH stage I (expected to finish in February 2013) which will be increased nearly to 40% of water supply capacity; especially, PPWSA will continue to enjoy as a monopoly in this industry for a long time in the future, and the expected earning rate will continue to be risen in double in the near future.
5. Earnings momentum
This is shown as a profitable company, when the growth rate of earning is over 20% and company profit is in the top of the market, so the stock price will be likely to rise. The growth rate of PPWSA will be risen in the nearly future because of the increasing consumption in waters and the new implementation of PPWSA project. Specially, the new demand in the market has increased such as new hotels, Buildings, Boreys, and the extension to the urban area of the PPWSA’s project. The EBIT margin (Earnings Before Interest and Tax) of PPWSA in 2012 and 2013 is forecast to increase more than 33%.
6. Historical growth rate
The PPWSA with a level of the growth rate for many years is attractive to the local and foreign investors and potential increasing in market price. The Average of Compound Annual Growth Rate of EBIT (CAGR) of PPWSA was 21.2% since 1997.
7. Sales momentum
The investors appreciate the companies with significant increasing in revenue and growth. We have to understand that the revenues’ growth are more important than profits in a period of time before making profits for most of companies, who make to the long term commitment in its business. PPWSA has significant in growth of revenue and rising profit since 1993.