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Single stock analysis examines the attractiveness of a specific share by means of financial data and other assessment criteria.
Random-walk hypothesis
The random walk hypothesis states that the future development of a
share price is not contingent on its
price history. According to this hypothesis share prices are governed by the
efficient-market theory which states that at any one time all available
information is already factored into the
share price. However, according to this
hypothesis technical analysis and fundamental financially-based analysis cannot produce any
meaningful predictions, as they take account of past price and corporate performance as
well as macroeconomic data.
Fundamental analysis
Fundamental analysis takes account of company-specific, financial and economic factors
in predicting future prices. Unlike technical analysis, fundamental analysis is not based on movements
in the share price. The focus is on the factors that have determined the share price in historical
and sector comparisons. Fundamental analysis also attempts to identify an over or undervaluation
of a company using certain financial ratios.
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There are a number of established methods in economics for valuing liquid shares. The main ones
are presented below using the example of a fictional company Example AG.
Key figures of Example Ltd
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Net income
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CHF 100 million
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Earnings per share
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CHF 10
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Dividend per share
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CHF 4
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Current share price
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CHF 150
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Number of shares
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10 million
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Price-earnings (PE) ratio
The PE ratio shows what multiple of the earnings per
share the share price is. A company with
a comparatively low PE ratio is considered good value, because this may indicate that the share price
is undervalued. This is because the share price is too low a multiple of the earnings per share.
A relatively high PE ratio suggests an overvaluation on the stock market. This is because the share
price is too high a multiple of the earnings per share. The long-term average in the SMI is a PE ratio
of 15. A lower or higher PE may be justified based on the future prospects of a company and other
factors such as interest rates. The PE is shown in the detailed view of shares.
Dividend yield
The dividend yield expresses
the dividend as a percentage of the
share price. The
gross dividend is used, i.e. the dividend
prior to deducting withholding tax. Comparing the dividend yields of different companies is more useful
than comparing the dividend alone.
The lower the share price, the higher the dividend yield if the dividend stays the same. If you buy a
share for less than CHF 150, the dividend yield is higher. Another
company pays a dividend of CHF 3 at a share price of
CHF 100. In this case, the dividend yield is 3%.
In other words, a small dividend may offer a higher yield than a bigger one. The dividend yield
is shown in the detailed view of shares.
Payout ratio
The payout ratio is also calculated on the basis of the gross dividend. It compares
the dividend per share to the earnings per share. The payout ratio shows the proportion
of its total earnings that a company pays out to its shareholders expressed as a percentage.
A company's payout ratio reflects its dividend policy. If 40% is paid
out to shareholders, 60% is retained by the company. Fast-growing companies
tend to have lower payout ratios because they use the retained earnings to finance their growth.
More mature companies with long-established product ranges tend to have higher payout ratios.
The payout ratio is shown in the detailed view of shares.
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Technical analysis
The purpose of technical analysis is to predict future price developments solely
on the basis of market prices and price trends. Unlike fundamental analysis, technical
analysis does not use micro or macroeconomic data. Price developments are examined for recurring
patterns and interpreted to produce market forecasts.
Chaos theory
Chaos theory, also termed chaos research, has its origins in weather research.
The goal is to formulate if-then rules that can be used to make forecasts on the basis
of current analyses. The analysis seeks to establish causal relationships which may at
first glance seem random but are in fact recurring. Such causal relationships may be weak or strong.
Neural networks
High-performance computers are used to help analysts in equity analysis. However, a significant
difference between computer models and human beings is learning ability, which is a central
human characteristic and affects the actions of the individual. The aim of developing
neural networks is to enable computers to behave in a similarly intelligent manner in the
face of changes and prevailing environmental factors. This is in turn intended to enable them to
recognise certain patterns within share-price movements, identify causal relationships
and use them to make price forecasts.
Bubbles
At certain times, markets are subject to sharp price fluctuations and high
volatility.
These phases are often called "bubbles". The term describes movements in share prices
that cannot be explained by fundamentals, where the observed price of a
share does not correspond to its intrinsic
value. Psychodynamic processes such as the herd instinct are often mentioned as
contributory factors.
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