Investing in stocks can be very daunting. The sheer amount of information out there makes it difficult for investors to choose the relevant criteria for investing in stocks. Therefore, learning the investing basics in Singapore is the first crucial step.
In this article, we break down the top 10 investing basics in Singapore to learn how to buy stocks in Singapore. In doing so, we also examine the key indicators of a company’s financial health and how you can decide if a stock is worth buying or not.
1. Investing Basics – Market Capitalisation
The first of the investing basics in Singapore is the market capitalisation of the underlying company. Market capitalisation is basically the market value of a company’s outstanding shares. This criteria is important because it shows how big a company actually is.
Market Capitalisation Shows the Size of the Company
This clears up a common misconception. Many investors starting out mistakenly think that the higher the price of the stock, the bigger the size of the company. Instead, one should look at the market capitalisation of the company for a better gauge. So how do you calculate market capitalisation? You can quite simply derive this by multiplying the number of outstanding shares with the company’s current share price.
However, you should know that market capitalisation relates to the price of the company at which investors are willing to pay for the stock. It does not necessarily show the company’s true value.
For example, if a company’s financials are doing poorly yet people are still buying the stocks at very high prices, then the market capitalisation is likely to be well over the actual intrinsic value of the company. In such a case, you would be overpaying for the stock if you buy into it.
You can obtain the market capitalisation of a company from the SGX website, under the StockFacts of a company:
2. Investing Basics – Profitability
As part of learning investing basics in Singapore, you need to understand the various ways to measure profitability. This is imperative in helping you to choose the best stocks to buy in Singapore by identifying financially sound and healthy companies.
Earnings Per Share (EPS)
Simply put, EPS is the amount of profit that a company earns per share. An investor can view a company as a more attractive investment if it has an increasing EPS every year as this means that profits are increasing at a steady pace.
Finding out the EPS of a company is easy as most financial websites would readily provide this information. In Singapore, you can find the EPS of a company on the SGX website, as shown below. Alternatively, you can calculate the EPS of a company yourself by dividing the net income of the company by the total number of outstanding shares.
However, do note that the normalised diluted EPS (as shown in the SGX website below) differs slightly from the regular EPS. This is because the diluted normalised EPS takes into account all the securities, including convertible securities, stock options and warrants.
Return on Equity (ROE)
Another way to measure a company’s profitability is using ROE. This can help you better decide on a stock in Singapore. In simple terms, ROE measures how well a company uses its investments to generate earnings.
To determine this, you divide the net income of the company by the book value of the equity, with the book value being assets minus liabilities.
A related ratio is the return on assets (ROA), which is net income divided by the average assets. The ROA shows us how effectively a company is making earnings based on its assets.
3. Investing Basics – Valuation
Another one of the important investing basics in Singapore relates to the valuation of the company.
This is where it gets a little tricky.
This is because investors can use are a variety of ratios to value a company and there is no consensus on the best ratio to utilise. You can actually look at each of these indicators together to assess the investment value of the company.
Price/Earnings Ratio (P/E)
The P/E ratio is probably the most popular ratio used by investors. This is especially if you are choosing stocks to buy in Singapore. You may calculate this by taking the current share price of a company and dividing this by the EPS (defined above) of the company.
This ratio shows the price that investors are willing to pay relative to the earnings of the company. Thus, a stock that has a low P/E ratio is commonly viewed as undervalued and a good buy.
However, this is not always the case. A low P/E ratio could also mean that the market does not think the stock will perform well in the future. This is because the market views the low P/E ratio as suggesting that earnings growth will be low. Hence, they are not willing to pay a high price now in anticipation of future earnings growth.
One can also find the P/E ratio in the SGX website in relation to a company’s valuation:
Different Industries have Different P/E Ratios
A useful thing to keep in mind is that different industries have different P/E ratio ranges. For instance, technology companies that have greater room for growth could have an industry P/E ratio that is higher.
On the other hand, companies providing consumer staples usually have a higher industry P/E because they generally have steady earnings growth and are relatively protected against recessions. Therefore, the best way to use P/E ratios is to compare companies in the same industry.
You can see the comparable companies listed on the SGX website, together with their P/E ratios:
Price/Book Ratio (P/B)
Another key ratio in knowing the investing basics in Singapore is the P/B ratio. It compares the market price to the book value of the company. The book value is essentially the total assets minus the liabilities of a company.
The way to calculate the P/B ratio is to divide the company’s share price by the book value per share of the company. The book value per share is in turn calculated by dividing the (total assets – total liabilities) by the number of outstanding shares.
The P/B ratio is more useful in certain industries, for instance, those relating to capital intensive or asset-based companies. Thus, P/B would be especially important for real estate investment trusts and property companies.
It would also be relevant for companies that have invested large amounts in tangible assets. Conversely, this ratio would be less pertinent to technology companies where their intellectual property and brand awareness are not captured in their book values.
When considering investing basics in Singapore, one can also look at the P/S ratio. This is crucial in stock picking and choosing stocks to buy. The ratio compares how much an investor pays for the share to the number of sales generated per share by the company. You can derive the P/S ratio by dividing the market capitalisation of the company by its total sales for the previous 12 months.
A general rule of thumb is that the lower the P/S ratio compared to other comparable companies, the better the investment. This is because this suggests that the stock is undervalued and investors are paying less for each unit of sales.
The Importance of the P/S Ratio
The P/S ratio is especially important for valuing growth companies, which would usually have weak earnings. This is due to companies pumping money into investments at the expense of their bottom lines. Thus, in such cases, using the EPS or P/E ratio to value them may not be as appropriate as the P/S ratio.
Ultimately, having high sales or revenue is only valuable if it can be converted into earnings in some future point in time. Therefore, the P/S ratio has to be seen together with a company’s debt levels. If the company has high sales but also has high levels of debt, this may be a red flag. This suggests that the sales are funded by debt and it may be more difficult for the company to turn a profit in the future.
So how exactly does one find out the P/S ratio? You can also calculate this from the information provided on the SGX website.
In the case of the above company, you can take the market capitalisation of $15,416,670,000 and divide it by the revenue of $5,087,752,000 for the last 12 months ending 31 March 2018.
Thus, P/S = (15,416,670,000/5,087,752,000) = 3.03.
4. Investing Basics in Singapore – Growth
Price/Earnings to Growth Ratio (PEG)
To learn more of the investing basics in Singapore, it is important to understand the PEG ratio. While the P/E ratio is useful, it does not take into account the earnings growth of the company. This is where the PEG ratio comes in. It essentially combines the P/E ratio with the company’s expected earnings growth to give a fuller picture of the company’s valuation.
The PEG ratio of a company is determined by dividing the P/E of the company by its expected earnings growth. A PEG ratio of less than 1 is usually desirable as it shows that the company is undervalued.
How do you determine expected earnings growth?
You simply take the EPS of the company last year and compare it with its EPS this year. In the example below, the earnings growth from financial year 2016 to 2017 would be (0.083-0.142)/0.142= -0.415. In this case, the earnings growth of this company is negative. Assuming a P/E ratio of 1, the PEG ratio would be 1/(-0.415)=-2.41.
5. Investing Basics – Debt
The debt-to-equity ratio, also known as the gearing ratio, measures how much debt a company uses to run its business. It shows how much debt the company has for every dollar of equity. A higher debt-to-equity ratio may mean that the company has been actively financing its growth with debt, which also indicates higher risks.
The thing to know about having high debt levels is that interests on these debts will likely be substantial. This would in eat into the profits of the company. Thus, this is another critical investing basic in Singapore that you ought to factor in.
Interest coverage ratio
Another key indicator of debt is to look at the interest coverage ratio. This measures how easily a company can repay the interest from its debts. This is determined by dividing a company’s earnings before interest and taxes (EBIT) by the company’s interest payments due within a certain period.
The higher the ratio, the better the company would be able to meet its interest expenses. This can also be seen as the amount of financial buffer the company has in the event it runs into financial difficulties in the future.
6. Investing Basics – Liquidity
You can choose how to buy stocks in Singapore based on the liquidity of the company as well. The current ratio, also termed as the working capital ratio, illustrates the company’s ability to pay back its liabilities. You can calculate this ratio by taking the current assets and dividing it by the current liabilities of the company.
A current ratio below one indicates a higher level of risk. This is because the company’s assets are lower than its liabilities and would be unable to pay off its debts if it were to come due.
Another useful ratio to assess a company’s liquidity is the quick ratio. The quick ratio is unlike the current ratio because it does not look at all current assets. The quick ratio only accounts for quick assets, meaning only the current assets that can be converted to cash within a short period of time such as 90 days. This would exclude current assets such as inventory that cannot be translated very easily into cash.
If a company has a quick ratio of more than one, it can be said to have highly liquid assets. In fact, it would be able to pay off their current debts using only quick assets.
The current ratio and quick ratio can be obtained from the StockFacts page of a company on the SGX website:
7. Investing Basics in Singapore – Efficiency
The next of the investing basics in Singapore is efficiency. This can be measured by various turnover ratios as discussed below.
Asset Turnover Ratio
Another indicator investors use to choose stocks or pick stocks is the asset turnover ratio. The asset turnover ratio indicates how efficiently the company is able to use its assets to generate sales.
This is calculated by dividing sales by the average total assets. Generally, the higher the asset turnover ratio, the better. This means that for each dollar of assets, the company is able to produce higher levels of revenue.
In the following example extracted from the SGX website, the company in question is generated $0.086 dollars for every dollar in assets for the financial year 2017:
Inventory Turnover Ratio
If you want to choose how to buy stocks in Singapore, you can also take a look at the inventory turnover ratio. This ratio shows how well the inventory is selling and how in demand the inventory is.
To be precise, the inventory turnover ratio measures how many times a company’s inventory is sold and replaced over a certain period. The inventory turnover can also be expressed into the average days inventory, meaning the estimated amount of days to sell the inventory.
The SGX website provides such information as well:
8. Investing Basics – Dividend Yield
The dividend yield also forms part of the key investing basics in Singapore. From the dividend yield, you can observe how much you will be paid as a shareholder relative to the stock’s share price.
This is more relevant for investors who are intending to hold on to stocks for the long term and to get passive dividend streams. In this regard, entities such as Real Estate Investment Trusts and Business Trusts boast one of the highest yields, with some providing upwards of seven per cent dividend yields.
You can calculate this by dividing the annual dividends per share by the share price of the company. If not, you can easily find this information on the SGX website as well.
9. Investing Basics – Trading Volume
The trading volume is the number of shares traded on the stock market during a specific period of time. If the volume of a stock is too low, then this may not be an ideal stock if you are looking to do speculative trading. This is because even if you are able to buy the stock, you may not be able to find someone to sell the shares you have bought.
Therefore, when learning the investment basics in Singapore, one should consider the trading volume of the shares as well.
10. Investing Basics – Governance and Management
Lastly, you should consider the governance and management of a company as comprising the investing basics in Singapore. This without a doubt forms an integral role in investing basics in Singapore. It makes sense to scrutinise the management team, including their profiles and resume. This is to see if they possess the requisite skills and expertise for their role in the company.
Another consideration is how closely the compensation packages of the executives and management are tied to the performance of the company. Giving stock options to management can help to align their interests with shareholders and strive to increase shareholder value.
On a related note, if insiders such as the CEO are purchasing shares of their own company (which has to be publicly announced for listed companies) this may indicate that insiders know something normal investors do not. This suggests that the management views the company as currently undervalued and believes in the long term performance of the stock. As such, this may also be a good sign that the stock is worth buying.
If you’ve read this article, you’re probably a beginner investor who wants to learn the investing basics in Singapore.
As complicated as it seems, investing is actually not all that difficult. All you need is to put in some time and effort to pick it up.
After all, it is often said that a journey of a thousand miles begins with a single step. By learning and absorbing the key investing basics in Singapore listed above, you are way ahead of others who aren’t willing to learn or read more about investing.
If the above investing basics in Singapore seem foreign to you and are difficult to absorb, don’t worry. Go ahead and take some time to re-read this article. With each read, your understanding of the investing basics in Singapore will likely improve and you’ll eventually become more knowledgeable about investing in Singapore.