| Long term investment in shares- the sure way to | | | | After making a list of companies, now the question is |
| make money-returns better than Banks. | | | | which to choose?. Go for a company which has good |
| This is for those who want to invest their hard | | | | return on capital and at the same time available at a |
| earned money in shares on a long term basis. There | | | | low price. If the price is high wait. Naturally the price |
| are lot of facts to be considered to predict the | | | | will be high when the market is on a bull run. |
| market. Any shrewd investor should do his | | | | HOW TO VALUE, WHETHER THE SHARE PRICE IS |
| homework on the industry in which he is going to | | | | AT 'BUY' FOR LONG TERM?. |
| buy shares from the market. The industry will have | | | | To arrive at the value you should know: |
| its ups and downs. This has to be taken into account. | | | | 1) Enterprise Value |
| Some external factors and events will also effect the | | | | 2) Return on Capital (average return) |
| performance of the industry as a whole.So, prudent | | | | 3) Calculate total capital at the time of buying shares. |
| as you are, choose a few industries in which you | | | | Enterprise value is the value that market is prepared |
| have some basic knowledge and study them for at | | | | to pay for that company. |
| least 6 months, when you have a considered opinion | | | | Enterprise Value = Market Capitalization + debt |
| about that industry,make a list of the companies in | | | | Capital |
| that industry and select some to make investment. | | | | Total Capital =Equity Capital + Debit Capital |
| PARAMETERS TO SELECT A COMPANY | | | | Equity Capital is the money contributed by promoters |
| 1) Equity capital should be in accordance to its scale | | | | and other share holders plus the portion of retained |
| of operation. | | | | profits(after disbursing dividends) |
| 2) Debt capital should be optimum, should not be in | | | | So when you decide to buy make sure that |
| excess to its scale of operation and technology. | | | | Enterprise Value = Total capital at the time of buying |
| Excess debt not advisable. | | | | X[1+ average return on capital%]^5 or 6. |
| 3) Return on Capital(equity capital+debt capital) | | | | If the left side is < or = to right side than 'BUY' |
| should be consistent on for a long period, should | | | | So the golden rule is invest in HIGH 'return on capital' |
| equal the industry average. Below that avoid. Above | | | | companies at a LOW price, which produces HIGH |
| average consider. This ratio is available in periodicals in | | | | 'return on investment' over a period of time. |
| the market. Zero in for a 15-20% return. | | | | |