Importance Of Trade Account Management

If you trade over long periods intervals, one technical analysis is not enough to identify undervalued or overvalued asset, because the difference in their value could be caused by fundamental factors. To estimate the relative values of the assets in the long term fundamental analysis is used, based on a comparison of financial multiples. The analysis can be performed on almost any financial indicators of the performance of a company.

There are many models of the fundamental measurement of fair value of shares, one of which is based on discounted future net income, the other on the carrying value of the company. The first model assumes that the net profit of the company will increase its own capital, and since these profits will be available only in the future, it is discounted based on the current risk-free interest rate.

However, to accurately predict future flows of net income is impossible, so most of its current value is extrapolated to future periods. Given that the valuation of the shares, then as the net profit ratio is used EPS (Earnings Per Share), reflects the net profit attributable to its common share.

Data on the company’s profits come from the profit and loss account. Knowing the EPS can roughly predict the future value of the book value (BV) of the shares used in the second model estimates the fair value of the shares. The current value of BV is based on balance sheet data by dividing shareholders’ equity by the number of common shares.

In other words, the P/E ratio expresses the market value of the units of the company’s profits. A lower value of the coefficient indicates that the profit of the company estimated the market for less than the profit of the company from which the value is greater. In addition, the P/E ratio shows how many periods must pass in order to fully cover the current stock price.

This Trade Account Management factor determines how much the stock is overvalued relative to its book value. In its crudest form, it means – what proportion of the spent funds for the purchase of shares, the investor will be able to reclaim in the event of bankruptcy of the company.

The coefficient of less than one indicates that the stock is trading below its carrying value and is undervalued, and vice versa, the value of the coefficient which is greater than one indicates that the company’s shares are overvalued.

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