Stock investors stray from fundamentals, prioritize quick profits

Investors seem to be focused on share price fluctuations rather than financial indicators while buying and selling securities on the secondary market.

A company’s share price is determined by supply and demand. However, investors sometimes buy low-yielding companies at high prices and high-yielding companies at low prices. Stock analysts say buyers today are putting money into stocks whose prices are growing faster without looking into fundamental and technical indicators. But it is important to make long-term investments only after analyzing the fundamentals, they say.

Share investor Navaraj Dahal says investors today are putting their money in stocks based on how much profit they can book in certain days without looking at financial indicators like EPS, NPL, and PE. According to him, stocks with negative net worth are experiencing positive circuits, while those with market values lower than net worth are seeing prices go down. “For example, the net worth of some commercial banks is higher than their market prices. But their share prices are coming down. It seems that investors are not looking at the fundamentals,” Dahal said. “The Nepal Rastra Bank (NRB) should remove the cap on margin lending for institutional investors for the demand for stocks of commercial banks to pick up.”

Even long-term investors are not putting their money in commercial banks because of their shrinking dividend distribution capacity, Dahal said.

Commercial banks, which used to distribute 30-32 percent dividends in the past, are now offering just 12-15 percent. Many aren’t in a position to distribute dividends at all.

Financial indicators such as earnings per share (EPS), share price, and price to earning (PE) ratio help investors to take long-term investments. These indicators can be found in the financial statements of listed companies. The most reliable indicator to analyze share prices and returns is the PE ratio.

The PE ratio is obtained by dividing the market value of shares by its earnings per share (EPS). The PE ratio shows how many rupees investors need to invest in the secondary market to earn a rupee per share of that bank. The lower the PE, the better the return is.

According to the financial statement for the second quarter of the current fiscal year, Kumari Bank’s EPS is the lowest at Rs 6.61. The bank’s shares are trading at a little above Rs 150 per unit on the bourse. Among the banks traded on the secondary market, Standard Chartered has the highest EPS of Rs 36.62. Everest is second with EPS of Rs 29.12, followed by NIC Asia with EPS of 25.59, Nabil with Rs 23.74, and Prime with Rs 22.50, respectively. EPS of other commercial banks are lower than Rs 20.

EPS is regarded as the reliable tool to measure the business and financial health of a company over a period. It is calculated by dividing the net profit earned over a certain period by the number of shareholders.

Share prices and PE ratio of commercial banks

Standard Chartered Bank has the highest share price among commercial banks in the country at Rs 540 per unit while Kumari Bank Ltd has the lowest. Likewise, Prime Commercial Bank has the lowest PE ratio of 9.28, while Nepal Bank Ltd has the highest PE ratio of 29.14.

Investors are advised to buy stocks with a PE ratio of less than 10 percent without any hesitation in the international market. But it doesn’t work in Nepal. Many commercial banks that are offering attractive dividends have a PE ratio of 15 percent.

“We don’t see investors making investment decisions looking at indications like EPS and PE of commercial banks. Selecting stocks with high EPS and low PE will safeguard investment in the future,” Dahal said. “But the market is dominated by traders at the moment who are looking for short-term profits.” According to Dahal, share prices of commercial banks rise if they are held for a long time. “But since the size of capital of commercial banks is big, no one can hold shares for a long time,” he added.