CAPM (Capital Asset Pricing Model)
ER = Rf + β(ERm - Rf)
Used to determine the expected return on an investment given its risk relative to the market.
Key Components:
- Rf: Risk-free rate (Sri Lanka T-bills)
- β: Beta (stock volatility vs CSE)
- ERm: Expected CSE market return
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DCF (Discounted Cash Flow)
Value = Σ [CFt / (1 + r)^t]
Values a company based on its projected future cash flows discounted to present value.
Key Components:
- CFt: Cash flow in period t
- r: Discount rate
- t: Time period
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P/E Ratio (Price to Earnings)
P/E = Stock Price / EPS
Measures how much investors are willing to pay per dollar of earnings.
Interpretation:
- High P/E: Growth expectations
- Low P/E: Value opportunity
- Compare: Industry peers
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PEG Ratio (P/E to Growth)
PEG = P/E Ratio / Earnings Growth Rate
Refines P/E ratio by considering earnings growth expectations.
Interpretation:
- PEG < 1: Potentially undervalued
- PEG > 1: Potentially overvalued
- PEG = 1: Fairly valued
ROE (Return on Equity)
ROE = Net Income / Shareholders' Equity
Measures how effectively a company uses shareholders' money to generate profits.
Benchmarks:
- >15%: Excellent
- 8-15%: Good
- <8%: Poor
EPS (Earnings Per Share)
EPS = (Net Income - Dividends) / Outstanding Shares
Shows how much profit is allocated to each share of common stock.
Analysis:
- Compare YoY growth
- Compare to industry
- Watch for consistency
