He should go joke with his grandparents.

Ask you how old you are. get to know why you cant think on your own. Slap you Proper.

Happy new year Mwalimu. Hope all is well.

Decoding DuPont Analysis
Fundamental Analysis, ROE
Return on equity (ROE) is a closely watched number among knowledgeable investors. It is a strong measure of how well a company's management creates value for its shareholders. The number can be misleading, however, as it is vulnerable to measures that increase its value while also making the stock more risky. Without a way of breaking down ROE components, investors could be duped into believing a company is a good investment when it's not. Read on to learn how to use DuPont analysis to break apart ROE and get a much better understanding about where movements in ROE are coming from.

ROE: Simple, Perhaps too Simple
The beauty of ROE is that it is an important measure that only requires two numbers to compute: net income and shareholders' equity.


ROE = net income / shareholder's equity


If this number goes up, it is generally a great sign for the company as it is showing that the rate of return on the shareholders' equity is rising. The problem is that this number can also rise simply when the company takes on more debt, thereby decreasing shareholder equity. This would increase the company's leverage, which could be a good thing, but it will also make the stock more risky.

Three-Step DuPont
To avoid mistaken assumptions, a more in-depth knowledge of ROE is needed. In the 1920s the DuPont corporation created an analysis method that fills this need by breaking down ROE into a more complex equation. DuPont analysis shows the causes of shifts in the number.

There are two variants of DuPont analysis: the original three-step equation, and an extended five-step equation. The three-step equation breaks up ROE into three very important components:
ROE = (net profit margin) * (asset turnover) * (equity multiplier)
These components include:
• Operating efficiency - as measured by profit margin.
• Asset use efficiency - as measured by total asset turnover.
• Financial leverage - as measured by the equity multiplier.
The Three-Step DuPont Calculation
Taking the ROE equation: ROE = net income / shareholder's equity and multiplying the equation by (sales / sales), we get:
• ROE = (net income / sales) * (sales / shareholders' equity)
We now have ROE broken into two components: the first is net profit margin, and the second is the equity turnover ratio. Now by multiplying in (assets / assets), we end up with the three-step DuPont identity:
• ROE = (net income / sales) * (sales / assets) * (assets / shareholders' equity)
This equation for ROE breaks it into three widely used and studied components:
• ROE = (net profit margin) * (asset turnover) * (equity multiplier)

We have ROE broken down into net profit margin (how much profit the company gets out of its revenues), asset turnover (how effectively the company makes use of its assets) and equity multiplier (a measure of how much the company is leveraged). The usefulness should now be clearer.

If a company's ROE goes up due to an increase in the net profit margin or asset turnover, this is a very positive sign for the company. However, if the equity multiplier is the source of the rise, and the company was already appropriately leveraged, this is simply making things more risky. If the company is getting over-leveraged, the stock might deserve more of a discount despite the rise in ROE. The company could be under-leveraged as well. In this case it could be positive and show that the company is managing itself better.

Even if a company's ROE has remained unchanged, examination in this way can be very helpful. Suppose a company releases numbers and ROE is unchanged. Examination with DuPont analysis could show that both net profit margin and asset turnover decreased, two negative signs for the company, and the only reason ROE stayed the same was a large increase in leverage. No matter what the initial situation of the company, this would be a bad sign.

Five-Step DuPont
The five-step, or extended, DuPont equation breaks down net profit margin further. From the three-step equation we saw that, in general, rises in the net profit margin, asset turnover and leverage will increase ROE. The five-step equation shows that increases in leverage don't always indicate an increase in ROE.

The Five-Step Calculation
Since the numerator of the net profit margin is net income, this can be made into earnings before taxes (EBT) by multiplying the three-step equation by 1 minus the company's tax rate:
• ROE = (earnings before tax / sales) * (sales / assets) * (assets / equity) * (1 – tax rate)
We can break this down one more time, since earnings before taxes is simply earnings before interest and taxes (EBIT) minus the company's interest expense. So, if a substitution is made for the interest expense, we get:
• ROE = [(EBIT / sales) * (sales / assets) – (interest expense / assets)] * (assets / equity) * (1 – tax rate)
The practicality of this breakdown is not as clear as the three-step, but this identity provides us with:
• ROE = [(operating profit margin) * (asset turnover) – (interest expense rate)] * (equity multiplier) * (tax retention rate)

If the company has a high borrowing cost, its interest expenses on more debt could mute the positive effects of the leverage.

Learn the Cause Behind the Effect
Both the three- and five-step equations provide deeper understanding of a company's ROE by examining what is really changing in a company rather than looking at one simple ratio. As always with financial statement ratios, they should be examined against the company's history and its competitors.

For example, when looking at two peer companies, one may have a lower ROE. With the five-step equation, you can see if this is lower because: creditors perceive the company as riskier and charge it higher interest, the company is poorly managed and has leverage that is too low, or the company has higher costs that decrease its operating profit margin. Identifying sources like these leads to better knowledge of the company and how it should be valued.

The Bottom Line
A simple calculation of ROE may be easy and tell quite a bit, but it does not provide the whole picture. If a company's ROE is lower than its peers, the three- or five-step identities can help show where the company is lagging. It can also shed light on how a company is lifting or propping up its ROE. DuPont analysis helps significantly broaden understanding of ROE

A very enriching thread once again. I would like to get in touch with Bwana Marty. Anyone with his email asidie ndugu..

willi arap lani at gmail dot com

Mwalimu,please continue the lessons.

Since mwalimu has been away for a while, thot i would share just to keep this thread alive.

5 steps to become a smart investor

For those of us who are still trying to get to the 9 figure mark here are a few steps.

1. UNDERSTAND HOW THE WHOLE PROCESS WORKS

B4 placing all your eggs in one basket, invest in "anything" first so as to understand what pushes the market value of a stock up or down. You need to understand the demand and supply factors practically.

2. LEARN HOW TO CHOOSE

A little bit of research, some theoretical and practical knowledge will ensure that things seldom go wrong.

3. NOW DECIDE HOW MUCH TO INVEST

You should not throw all your savings in one particular investment because, any investment carries certain amounts of risk. So the answer to the question how much to invest would depend on your appetite for risk. (your risk tolerance capacity.

4. MONITOR AND REVIEW

It is recommended that you monitoring your investments regularly. This is more important during volatile times when there can be great opportunities for buying and averaging your cost of investment.

5.LEARN FROM YOUR MISTAKES

Investing is a long, learning experience. You will make mistakes, but also learn from them. Nothing beats first-hand experience. These experiences will help you emerge as a smart investor.

Investing vs Trading vs Speculation

INVESTING
Its the proactive use of money to make more money or, to say it another way, you make your money work for you. Good investments are the soundest way of growing wealthy but can take time, perhaps even years, to work out because we live in an uncertain world.
Investors adopt a “Buy and Hold” approach

TRADING
More short-term activity than investing. It is buying something at low prices and selling it for a gain. A trader is always concerned about short-term fluctuations in prices, because he’ll even out them in the long run. Traders adopt a “Buy & sell” approach.

Short term price fluctuations are caused by the variations in the demand and supply of a particular asset. So, traders generally rely on Technical Analysis, a form of marketing analysis that attempts to predict short-term price fluctuations using graphs, charts and oscillators.

SPECULATION
A speculator is nothing but a man who makes his living out of hope. To quote Benjamin Graham "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative”-(Benjamin Graham, security analysis,1951)

It is important to understand that investing; trading and speculating are three different things.

Cheers @murchr. Here are some quotable quotes on Value Investing. Liked a couple, more with the link.


"The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable." - Warren Buffett

"You are neither right nor wrong because people agree with you." - Benjamin Graham

"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass." - Charlie Munger

Read more: Notable Quotes http://www.ndir.com/SI/articles/quotes.shtml

Enjoy.

Why not start your own thread? Instead of riding on the wave of others

This might dilute what Mwalimu shares and/or discourage him from continuing. Live in your own house.

TURNING POINTS & TRENDS

Turning points are spotted through fundamentals or technical analysis or by studying the general economic indicators of a market. Most importantly one must monitor the trends on the "Volume and the Price"

*Volume – tells you whether the market participants are buyers or sellers of the stock.
*Price – tells you which direction the stock is moving(up or down).

If the number of shares traded is high and the prices are also moving higher- that’s a positive signal. You are probably looking at a large group of people investing heavily in that stock.

If the number of shares traded is high and the prices are coming down – that’s should ring the alarm bells. You are probably looking at investors backing out from that stock.

Slow pace in buying means that there are not many sellers for the stock, which is a good sign. It also indicates that the price is almost at it’s peek and a further up move is unlikely immediately however since the sellers are in short, the stock might move higher after a certain amount of time.

A relatively big volume increase during the price advance with lower volume on the pullback (when the stock price briefly fluctuates) indicates a continuing uptrend. The lower volume during the pullback indicates that there are not enough sellers in the market to drive the stock down.

A big buying volume without the price going higher indicates distribution, which means resistance. A big seller is likely in the market. There is no way to tell yet if the buyers will win this battle and are able to drive the price higher, or if they will give up and the stock eventually reverses.

A slow and steady movement upward with consistent volume indicates continuing upward momentum. There might be a buyer in the market who is steadily buying shares while trying to not attract too much attention.

To conclude; Tracking on price and volume for a few days will give you a general idea on the direction of the market and with some data and practice, you can spot the warning signs that a change in direction or trend is about to occur. It is also wise to look at the 52 week chart just to evaluate the 52wk lows and highs.

TECHNICAL ANALYSIS
Gaps
For wazua members, you must have read comments from others about "gaps" and have read statements such as "..these gaps have to be filled" . So GAPS are area(s) on a price chart in which there were no trades. It is easy to see gaps if you take candle stick charts.(theres a topic on wazua on candle sticks someone had offered to discuss them a while back). Forexample if the high of a stock yesterday was 80 and low was 50 and today the high was 100 while the low was 75, so when a chart showing highs and lows is drawn it will indicate a discontinuity, termed as a ‘Gap’ in technical theory. Interestingly gaps get filled in a short time that is the price will come back to fill the price gaps that were not taken previously. There are several types of gaps (homework - read about them from the web).

Charts
There are 2 types of charts (i) continuation - suggests that prior trend will continue (ii) reversal - suggests that the prior trend will reverse upon completion of the pattern.

Triangles
There are three types of triangle patterns – symmetrical, descending and ascending, which are constructed by converging trend lines.
A symmetrical triangle is formed when two similarly sloped trend-lines converge, typically suggests a continuation of the prior trend.

A descending triangle, which is formed when a downward sloping trendline converges towards a horizontal support line, suggests a downward trend after completion of the pattern.

An ascending triangle, which is formed when an upward sloping trendline converges towards a horizontal resistance line, suggests an uptrend after completion of the pattern. There other methods of technical analysis that are used to establish trends eg bottoms, tops etc. but these are the most common

For fundamental analysis read post#528 by @ngapat he's laid it down well and clear

Anyone with more infor feel free to share

And thanks to @CDE and @streewise, Kazi iendelee.

Next topic - Value Investing (time for those buffet quotes)