Earnings per share

Financial ratios - EPS


One of the problems with investing in shares is that we can't predict the future. We can never know for sure how the price will move. Even the great investor, Warren Buffett, is limited by his lack of psychic ability. Of course this is an obvious statement. I do not believe that anyone has supernatural powers with which to predict the future. However, investments do involve an element of analysis and as a result involves assumptions and then ultimately, predictions.

I have often wondered how investors decide how the share price of their current investments will move. After much digging I have come up with one possible solution.

Earnings per share measures the amount of profit before tax divided by the number of outstanding shares in issue. It is supposed to measure how much profit is attributed to each share, i.e what future profits are attributed to that share that you hold. The share price attributes a portion of value to each share. In theory, if you could predict the growth in earnings per share then you would have a decent indicator of how the future share price should move.

But how can we predict earnings per share?


Admittedly there is no easy answer to this question. However, I have been trialing one method. I will use Debenhams Plc as my example. Reviewing the 2012 Annual Report, I found that Earnings per share (EPS) in 2011 was 9.1 pence. In 2012 it was 9.7 pence. This represents a 7% growth in EPS over 2012. Reviewing the past 5 years showed that EPS had grown on average about 6% per annum. Assuming all other variables remain constant, we would expect this performance to continue into the future. As such the value of the shares should also rise accordingly.

So we are using Earnings Per Share growth as a proxy for share price growth.  As a result predictions can be made about future share price movements.  These growth predictions should then be discounted to today's prices (watch out for an upcoming post on the subject of discounting). Essentially, you want to account for the fact that there is inflation eroding the future value of shares.


A Qualifier...or two on earnings per share


There are of course lots of flaws with this method of modelling share price movement. One of the main assumptions made was that all other variables should remain the same. There is nothing to say that this should be the case. It is possible that revenues suddenly drop (e.g. Due to the snow less people may be out shopping at Debenhams), impacting Earnings Per Share. As such, Earnings Per Share do not have to be stable and growing into the future.

Furthermore, there is nothing to suggest that the share price should follow Earnings Per Share growth. Prices have been affected by the "animal spirits" of investors since the first investments were made; over-confidence and over-despair has always been a driver for the movement of share prices. However, in the long run I think it is fair to assume that the Earnings Per Share should be a long term drive of the share price as the price move to reflect the growing value of each share.

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Lonrho Plc - A Successful Investment

When investing works


I have written a number of articles previously on the subject of the African focused conglomerate, Lonrho Plc.

After an initial purchase, followed by a sharp decline in price from 11.12 pence to 4.5 pence I reviewed my investment, concluded that it was a sound one, and bought more. In all, I invested £1,000 into the company, about 15,000 shares. The main reason that I decided to buy more shares after such a dramatic fall in price was (as I had written previously) due to the proven growth in the company and strong and growing balance sheet. 

I am very pleased to announce that on Monday 15th of May it was announces that a Swiss Company will take Lonrho plc private. It was agreed that every investor will have their shares bought out at 10.25 pence each. This is a huge premium considering that the company share price closed at about 5.5 pence per share the previous day. Clearly, they see a lot of growth potential in the company, just as I did. The following day (Tuesday 16th May) I received the following email from by online broker:

Dear Investor,

Corporate Action - Lonrho - Scheme of Arrangement

The board of Lonrho and the board of FS Africa have announced that they have reached agreement on the terms of a recommended cash offer by FS Africa for the entire issued and to be issued share capital of Lonrho. The transaction is to be effected by means of a court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006.

Prior to the scheme becoming effective, a request will be made to the London Stock Exchange to cancel trading in Lonrho shares on its market for listed securities on the first business day following the effective date and the UK Listing Authority will be requested to cancel the listing of the Lonrho shares from the Official List on the first business day following the effective date.

Terms:

10.25 pence in cash per share.

On the above you are due to be credited with £1,704.88.

Please note that there is also a corporate action handling fee of £10 to be levied on to the above proceeds.

The dates for the scheme have not been announced yet.


What has this investment taught me?


Firstly, I must admit that I first discovered this share on a tip from a friend. I would never want to imply that this was a great investment based on that recommendation. In fact, had I simply bought the first set of shares and left them, I would have lost money on this investment. This is because I bought the first lot at 11.12 pence, whereas we investors are being bought out at 10.25 pence. It was my re-evaluation of Lonrho Plc that encouraged me to buy more shares at the very low price of 4.5 pence that made this a 70% profit investment over two years.

I was encouraged to invest more, based on the companies growing revenues year on year, it's knowledge of the marketplace - based on it's 100 year history, its involvement in Africa; an area of future growth, and its strengthening balance sheet.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Don't Budget! Record!

Why Budgeting Doesn't Work


I have a big problem with Financial advisors, Personal Finance Blogs and Gurus advising those who struggle with money to budget! It's irritating to someone who is poor at handling their finances to be told that the solution is simply to allocate their income in advance to various pools of spending. If budgeting was that easy then we would all be doing it. The truth is that most of us don't know what we're going to be spending in the next months or two let, nor are we disciplined enough to stick to our estimates.

I must admit that I am guilty of telling people to budget, having written two articles on the subject and mentioning it as part of the Multimillionaireroad Plan. On reviewing those previous articles it has become clear that the titles are misleading. What I advocate is a type of transaction recording system and not a budgeting system, with which to control personal spending habits.

Why you should record your transactions instead of budgeting


I think that the main problem with telling people to budget is that those who don't know how to handle their money are not fully aware of their spending habits. As a result their estimates for budgeting purposes are wholly inaccurate and based on false assumptions of ones own spending habits. As a result actual spending in the following month is not in line with amounts budgeted for at the beginning if the month.

I believe that for every transaction that you make you should record it somewhere. I advocate writing a note (either on paper or on your phone) of the amount spent along with one word   description if the item such as "food" or "restaurant". Every so often you should spend a couple of minutes a week updating an excel spreadsheet with these amounts.


What are the benefits of recording transactions instead of budgeting?


The reason why actively recording every transaction works is because the action forces you to be conscious of your spending habits. You need to mentally recognise every transaction and write it down, drawing your attention to it. Furthermore, every week or so you can open your spreadsheet and analyse the areas in which you are overspending. The longer you record your transactions the clearer your spending patterns will become. This can help identify where you are overspending - are you spending too much on eating out, for example? Additionally, any unusual spending will be recognisable as it will not be in line with your regular spending month to month. You can then adjust accordingly in the future.


Budget conclusion


Don't Budget! Record!

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Multi-Millionaire Road Plan Review (4)

Blueprints:
This post details what I have achieved so far. This article has a lot of links to other articles I have written to demonstrate how the articles interlink to form my plan. Think of these sorts of articles as review and the blueprints to my Multi-Millionaire Road Plan. Feel free to compare to my previous report:

Multi-Millionaire Road End of Year Report:

I wish to extend a big thank you to all my readers. I really enjoy any interaction that we have over comments and email. Please please get in touch - to chat, compliment, criticize, or even curse!

Picture from freedigitalphotos
I am now able to save roughly 20% of my monthly net (net of tax and pensions) income. This is around £340. Additionally, £135 goes into a pension scheme each month that is matched by my employer in full. This money is taken directly from my current account into a monthly saver earning a meagre 3.5%. At the end of my financial year (July for me) I will transfer the total sum into a trader account to buy more undervalued and dividend paying stocks and shares.Sometimes I am able to save more through careful buying and budgeting. I wish to emphasise that I do not budget in the conventional way - I do not plan every penny that I will spend, rather, I make a conscious effort to be aware of current spending.

My current share portfolio is having mixed results with my banks performing well, however the mining stocks are being crushed by falling gold prices. The FTSE100, for example currently sits at about 6450 points. As the Fiscal Cliff nears its end, things are looking good for the years ahead in the markets.

If you take a look back at an article back in March 2012, I gave my original financial breakdown. I now wish to update my current asset holdings:
  • £925 - Sits in cash as a deposit for the flat I currently rent
  • £2370.76 - Current Account
  • £1763.70 - Monthly Savings Account
  • £391.69 - Everyday Savings Account
  • £7959.69 - Loyalty Reward ISA
  • £100 - UK Premium Bonds
  • £10,449.38 - Online Shares
  • £2,007.73 - Funding Circle Investment
  • Total Accessible Assets: £25,967.95
  • £2,079.99 - Friend's Life Pension (7 months contribution)
As you can see my total accessible funds has fallen by about £120. I put this down to the fact I have almost doubled my stockmarket investments. I have found that my investment ideas take a little time to prove themselves good or bad. In this time I have lost out on interest that I otherwise would have got and on investment charges such as stamp duty taxes. Furthermore, it was during this period that I paid for my holiday (about £700). I am not worried about my asset growth progress. Since March 2012 - 13 months ago, I have grown my net wealth by about £3,000. This is track to grow my wealth by about £4,000 from September 2013 until September 2014.
I have now included the value of my pension as this will form part of my assets in later life.

Originally I wrote a post on a Get Rich Plan and am currently in the middle of implementation. Whilst I have a long way to go, I am currently laying the foundations of this plan. I will now go through each section, briefly:

  1. Frugality - I spend about £100 a month on food and am careful in the sense that I keep an awareness of my spending habits.
  2. Budgeting - all going according to plan. My method allows me to ascertain where I may be spending too much.
  3. Saving - I am able to save 20% and above of my monthly net income. I still haven't switched my bank account. However, I really should consider it at some point in an effort to get a better interest rate, especially now that there is a lot more money going through the account.
  4. Debt - Although I have two credit cards, I have no debt. I pay them off in full each month. I have one credit card which gives 3% cashback (up to a maximum of £100 a year) and another that gives 0.5% cashback. Read my article to explain how to maximise the cashback on credit cards.
  5. Housing - I currently rent accommodation in London. Rent sits at £690 per month, not including bills. This seems rather high. In the summer when this tenancy agreement is up I will be moving to a cheaper area in London saving an extra £100 a month on accomodation. However, transport will cost an extra £30 per month. For more information on my ideas on Housing read my article: Renting Vs Buying
  6. Investing - on the whole this area of my personal share portfolio is going well. After recent additions my current share portfolio has growth 7.4%. This drop in growth appears to be due to the poor performance of my mining stocks and the introduction of capital averaging down my growth rate.
  7. Tax - I have utilized about £2,500 of my cash ISA this year so far. I need to top up my tax free ISAs before next April. I need to look into investing in a structured product that may give me 10.5% growth. I am now starting to utilize my investment ISA with an ISA stocks and shares trading account.
  8. Job - My base salary is £27,150. In September I am hoping to get a bonus of £1,000 (gross) for passing my exams first time. Living as a young professional living in London has huge opportunities for networking but of course is highly expensive.
  9. Time and Patience - Slowly but surely, year by year, the seeds which I am planting will grow into trees.
  10. Self-belief - check. I will make it
As you can see, on the whole things are looking good. There is much work to be done but at 23, I have time on my side.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.

Disclaimer

Information on this site is not appropriate for the purposes of making a decision for carrying out a transaction or trade nor does it provide any form of advice (investment, tax or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.
Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter