Investment valuation using price/earnings ratio

WE have used the P/E ratios more often than we know in our lives concerning purchases and investments. Few realise how important this financial ratio is. At present, this ratio is primarily used for shares or company valuation.

In simple terms, a P/E ratio is the ratio of the price of an investment divided by its earnings. A more technical definition for a company or share valuation would put it as valuation ratio of a company’s current share price compared to its earnings per share (EPS). Let’s say Venecio Bhd shares are trading at RM20 and the recently concluded financial year, resulted in net earnings of RM125mil with 50mil shares issued. Therefore, the EPS is RM2.50 per share (RM125mil/50mil), and that gives a P/E ratio of eight (RM20/RM2.5).

This means that for every ringgit the company makes, investors are willing to pay RM8 for it. There are long debates on the applications of P/E ratio for shares, but we shall not delve into this, rather I’d like to touch on P/E ratios for personal investment evaluations.

Calculation of P/E ratio for a property investment evaluation is pretty straight forward. For a house that yields a rental income of RM1,000 per month, that works out to be RM12,000 per year. With the house valued at RM240,000 that derives to a P/E ratio of 20 times. Based on my experience, this rate seems to be the valuation point of landed properties in the Klang Valley. To be more accurate, some would deduct direct expenses to derive at the net rental income less expense. Rates lower than these could either entail a bargain or a low valuation placed by investors, while rates above would translate as either a premium, or over valuation by investors.

We can also calculate the annual Return on Investment (ROI), simply by dividing the annual rental against the investment value, and this derives to 5%. This is actually the inverse of the P/E ratio, whereby 1 divided by 20 gives 0.05 or 5%.

What this means is that at 5% annual ROI, it will take 20 years (at current rate excluding inflation and other factors) to recoup the investment.

The P/E ratio can also be used if you are evaluating to sell your property (besides having a market price evaluation). For instance, if you had purchased a RM240,000 property, and three years down the road the rental has increased to RM18,000 per annum. Assuming the property P/E ratio remains, then the property should have a valuation of RM360,000 (RM18,000 X 20). This represents a three year cumulative average growth rate (CAGR) of 22.5% which can form a benchmark.

Based on the tables on a few tabulations for properties around the Klang Valley for comparison purposes, a few deductions can be made from the information gathered, as follows :-

● Landed properties generally has higher P/E ratios, as compared to condominiums.
● Condominiums on the other hand, generates better ROIs as compared to landed properties.
● Well established areas calls for higher P/E than new townships, and generate lower ROIs. This can be interpreted as higher investment return potential for new township properties.
● Lower P/E condominiums seem to generate higher ROIs.

A high P/E ratio can mean an over-valued property or a property in which the market places a premium therefore “approved” by market forces. Likewise, a lower P/E can translate as under-valued with a potential to increase. The tabulation has also not considered the maintenance fee that usually entails condominiums, and if this is lessened from the rental, the ROI may reduce to approximate the landed properties.

Depending on your budget and purpose of purchase, you can fit your requirements within this ambit of selection process. There are other considerations as well which should not be excluded. These would include, freehold land or leasehold, built-up, land area, maintenance fee, close approximate to shops, schools, facilities, etc.

The P/E ratio and ROI can be a valuable tool in your property decision making process as shown above. While some of the findings may defer with a bigger sample or new locations, it’s a start to a whole new definition to your house hunting process. You can also track P/E ratios over time, to build a trend in which a growing trend would denote appreciating value.

P/E ratios can also be used to evaluate other investment options, so long as the parameters required for the decision making process can be ascertained.

COMMENT
By RAYMOND ROY TIRUCHELVAM

● The writer, a business planner with Sabic Group of Companies, is “doing more homework today, to make up for those he missed in school.

Family-friendly game attempts to unlock creativity

 
CO-OPERATIVE: The PS3, 360, PC and Mac versions of Create allow level sharing via the Internet.

 

EA's UK outpost have revealed their pet project, Create, promising to provide a digital playpen in which families can club together to beat each challenge.

With a strong DIY aesthetic, players pick from a toolbox of props and objects, altering levels in order to clear a path for buggys, barrels, bikes and dodgem cars.

In some challenges, the chosen vehicle must make its way towards an obstructed destination - like the ooze in Pipe Mania or the cliff-loving mammals of Lemmings - and players work out how to avoid or use the items in its way.

In others, objects must be ferried safely to their destination by tweaking a makeshift transport.

Though popular web browser titles such as Wake The Royalty, Cargo Bridge and Transformice have already shown that games can integrate physics and engineering without losing a sense of fun, Create balances its challenge mode with a level creation suite that allows the construction and decoration of more domestic scenes.


A passing resemblance to two other well recent console titles that came with integrated level-editors, LittleBigPlanet and Joe Danger, may not be entirely co-incidental as EA Bright Light are located in the same city as LittleBigPlanet studio Media Molecule and Joe Danger makers Hello Games.

One key difference is that unlike those two PlayStation3 exclusives, Create is multi-platform, coming out on Wii, PS3, Xbox 360 as well as PC and Mac.

The PlayStation3 version also has Move functionality so that those with the console's new motion controllers can point and click just as on the Wii. Like LittleBigPlanet 2, it's targeting a mid-November release. - Relaxnews

Source: http://www.techcentral.my/news/story.aspx?file=/2010/8/4/it_news/20100804161125&sec=it_news

Can Google Get Social Networking Right?

The company has many social projects, but may struggle to improve on Facebook. By Erica Naone

 Rumors that Google is building a new social network have persisted since late June, when Kevin Rose, CEO of Digg.com, posted on Twitter that the Web giant was working on a challenger to Facebook. The company's recent actions--its reported investment in Zynga, a social gaming company, and its acquisition of Slide, a company that makes various applications for social networks--have fanned the flames.

Credit: Technology Review

Google already owns several products that encourage online social interaction--including YouTube, Google Talk, Google Reader, and Blogger. But it has struggled to deliver a successful dedicated social networking service. Its existing social network, Orkut, has far fewer users than Facebook (around 100 million, compared to 500 million), and is mainly popular in Brazil and India. And the launch of Buzz, a social network built into Gmail, was botched after users complained that their privacy had been invaded. Google has acquired several promising social services, including the microblogging site Jaiku and the location service Dodgeball, only to hold back on investing in them.

Some argue that Google has failed to deliver the kind of overall experience people expect from a social network. "Google has never come out with any [social networking product] where the experience drove it," says Jared Spool, founding principal of User Interface Engineering, a consulting firm based in North Andover, MA. "It was always the technology and the engineering that drove it--the experience was sort-of layered on afterward."

Spool notes that other failed social offerings from Google, such as Lively, its foray into virtual worlds, and Wave, an experiment in online communication and collaboration, originated as side projects for the company's engineers. Spool says that it is hard for side projects to be expansive enough to become a fully featured social network.

Nick O'Neill, a social-networking industry expert who runs the blogs The Social Times and All Facebook, says Google is desperate to get more involved in social networking because Facebook is collecting commercially valuable information that Google can't access.

O'Neill says that sharing content with friends provides important data on users' interests and behavior--useful both for providing better search results and delivering more effectively targeted advertising. To maintain its dominance in both fields, O'Neill says, Google needs to hone its search results by considering a user's social connections and the information shared with friends. Google may believe it needs its own social network to get the best social information, he says.

Google's existing social offerings are scattered, and it will take a focused effort to pull them all together, Spool says. He thinks users will expect nothing less than a spectacular new product from the company. "Google has way too much baggage," Spool says. While users might forgive a startup social network for lacking features, they'll want any offering from Google to have full integration with Gmail, Docs, and its other products.

Google already has popular communication tools, and plenty of content being shared on sites like YouTube, Picasa, and Google Reader. It is also involved with OpenSocial, a system for adding third-party applications to social networks, and has FriendConnect, a service that lets websites add social features that allow users to interact with each other and pull in content from social networks.

But Google will have to tread carefully as it tries to gain traction against Facebook. "A social network only works with a social graph in place," says Spool, referring to the connections between users on a social network site. With Buzz, Google tried to populate its social graph automatically, using links between Gmail users. But the resulting backlash--as users felt their privacy had been violated--shows that Google cannot easily exploit the user data it already holds.

Spool compares Google's Facebook problem to trying to compete with a popular frat house party. Another group can try to get a better keg and a better band, he says, but if most people are still at the frat house, there's not much that can be done. Users need a good reason to switch to a new social service. Google may have been hoping that an innovative social service, such as the now-canceled Wave, which offered a completely new approach to online communication and collaboration, could draw users away from Facebook, he notes.

Facebook, meanwhile, has its own problems, and some of these could turn out to be opportunities for Google. Ben Gross, an expert in online identity, notes that Facebook and other social networks don't accurately differentiate between people's social connections, making their social graph information less valuable to users and advertisers. For example, social networks tend to put all of a user's connections into a single group of "friends," and expect users to manage complex privacy settings to sort out family, work connections, and bar buddies. "Social network services should not assume that networks are flat, or that people are willing to put in the effort to articulate these networks or that they even want to," he says.

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Good luck

They really need to hire some artsy design weirdos at Google if they want to stand a chance. I like the simplicity of their basic site but everything is fairly ugly from their docs through gmail. 

Also, internally, different software groups members follow other members using their "buzz". So, some frickin idiot thinks "let's do that for everyone ... automatically". Let's see: I email students about research problems, my old Grad school buds about that those LSD experiments, my parents about their health, my kids about the homework and various business people about various business projects.  Yea sure I want all these people mashed up together following my "feed"!  That's the biggest WTF?! I've ever seen.

Given that track record, my bet is on facebook ... it is really stupid about how to categorize "friend" too, but it grew up organically that way and so everyone there puts on an act. 

I do have use for something like Wave though ... and now it's "bip" gone.  It was not communicated well, and their slow beta invites put me to sleep waiting until I forgot all about it.  Hire some real product designers, preferably who can barely program. Steve Jobs is a nut, but where would phones be without him?