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Value investing metrics applied to Norwegian shares

Updated on April 11, 2011

Value investing metrics applied to Norwegian shares

Ken Fisher proposed to use sales ratio to improve stock picks. The price to sales ratio (PSR) is calculated by multiplying the number of outstanding shares and current market price. Next, divide this number by the previous 12 months revenue. Additionally it is useful to calculate book value per share and earnings power value (EPV) per share to avoid making a stock pick on a single criterion. A book value per share and EPV per share higher than the current stock price indicate that a stock is cheap.EPV is calculated by dividing earnings by the cost of capital and then subtract net debt. Finally divide EPV by the number of outstanding shares. A low PSR can help identify a cheap stock. Fisher argued that a PSR below 1 is important. Earnings could be influenced by all sorts of one-time events driving prices up or suppressing them. A low price-earnings (PE) ratio would in this case mislead investors to believe that a stock is cheap. The PSR will enable the investor to look beyond volatile earnings. However a low PSR may also reflect a company in serious financial distress. Therefore it is important to combine with other metrics. Finally it may that the strategy of buying low PSR companies may be exhausted by traders.

In the following we intend to test the above metrics on Norwegian shares. We have applied it to Statoil Fuel and retail (oil and gas), Jinhui and Belships (dry bulk), Frontline (oil shipping) and Morpol (salmon). Table 1 shows the results. Jinhui and Belships come out as winners based on valuation. However Belships has negative EPV per share. The remaining shares appear expensive.

 
Statoil Fuel and retail
Jinhui
Frontline
Morpol
Belships
Book value per share
23.69
42.96
51.74
11.77
11.37
EPV per share
34.51
49.84
-73.10
-8.97
-10.26
PSR
0.24
0.8
1.7
0.82
0.51
current price (NOK)
62.75
18.8
129.5
21.4
7.2

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