Why EPS, P/E ratio, NAV, ROE, ROA and dividend yield are never enough in investments

Sometimes, it is quite common for new investors crazy about calculate so-called investment tools like EPS, P/E ratio, NAV, ROE, ROA and dividend yield etc during choosing a good investment. However, experienced investors always share their experience since investment is not merely a mathematics calculation and comparison. This article, Understanding Fundamental Analysis (Part 5), have explained the reason behind.

This article is using Lehman case as an example to explain why EPS, P/E ratio, NAV, ROE, ROA and dividend yield are never enough in investments.
"Lehman’s revenue and earnings have been soaring and beating analysts’ forecasts for 5 consecutive years. But let us take a look at its cash flow statement and balance sheet. It is clear that Lehman was highly leveraged. It has been increasing its borrowings at a frantic pace over the years. In FY07, Lehman booked US$6.8b in operating profit and equity of US$21.4b, but it had US$434b in borrowings, meaning that its leverage ratio was 20 times."

Lesson From This Case Study:
Never ever invest in a company with very high leverage.

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia

Advertisements: