Table of Contents:
- Understanding Key Metrics: What They Are and How to Use Them
- Portfolio Diversification: Evaluation and Optimization Strategies
Understanding Key Metrics: What They Are and How to Use Them
Portfolio Valuation
Understanding the valuation of your portfolio is essential for effective investment decision-making. Metrics like Fair Value, calculated via the Discounted Cash Flow (DCF) method, along with Price-to-Earnings (PE), Price-to-Sales (PS), Price-to-Expected Growth (PEG), and Price-to-Book (PB) ratios, provide a comprehensive picture of your portfolio's market valuation. These measures allow you to evaluate whether your investments are underpriced or overpriced based on earnings, revenue, growth potential, and book value, guiding strategic choices for rebalancing and optimizing returns.
The Portfolio Fair Value is determined using the Discounted Cash Flow (DCF) method, an intrinsic valuation technique that forecasts future cash flows of each stock in your portfolio. Please refer here to learn more about the Discounted Cash Flow model. This insight helps investors understand the strengths and potential risks of their portfolio, guiding strategic decisions like rebalancing.
Formula:
Portfolio Price= Sum of (no. of shares × current share price)
Portfolio Fair Value = Sum of (no. of shares × Fair value)
The Portfolio Price-to-Earnings (PE) Ratio assesses the value investors place on a portfolio's total earnings. It's particularly relevant for portfolios comprising mature and profitable companies.
Formula:
PE Ratio = Sum of (no. of shares x current share price) ÷ Sum of (no. of shares x Earnings per share)
The Portfolio Price-to-Sales (PS) Ratio measures the value investors place on a portfolio's total revenue. It's especially useful for portfolios with rapidly growing or unprofitable companies.
Formula:
PS Ratio = Total of (no. of shares x current share price) ÷ Total of (no. of shares x Revenue per share)
Note: Holdings with negative Revenues are excluded
The Portfolio Price-to-Expected Growth (PEG) Ratio offers a different perspective on your portfolio's valuation by considering not just earnings but also expected earnings growth. This ratio is particularly valuable for investors looking to assess whether the portfolio's growth prospects justify its current valuation.
Formula:
Weighted average of the PEG ratios of individual stocks in the portfolio
Note: Holdings with negative Revenues are excluded
The Portfolio Price-to-Book (PB) Ratio measures the market valuation of your portfolio compared to its book value, particularly effective for portfolios with a mix of mature and capital-intensive companies such as banks, REITs, large manufacturing companies, etc. A lower ratio might indicate an undervalued portfolio, while a higher ratio suggests a potential overvaluation.
Formula:
PS Ratio = Total of (no. of shares x current share price) ÷ Total of (no. of shares x Book value per share)
Future Growth
Comparing your portfolio's growth metrics to the broader market is essential for understanding its performance and potential. Key indicators like Annual Earnings Growth, Annual Revenue Growth, and EPS (Earnings Per Share) Growth provide a comprehensive view of how your portfolio stacks up against market trends over 3-year historical and projected periods. These comparisons highlight whether your portfolio is outpacing, matching, or lagging behind the market in terms of earnings, revenue, and per-share profitability. By evaluating these metrics through weighted averages of past and future growth, investors can assess the portfolio's growth trajectory and make informed adjustments to align with market opportunities.
The Annual Earnings Growth vs Market bar chart showcases the comparison between the Portfolio's Annual Earnings Growth and that of the broader market, spanning both past and projected future performance over 3-year periods.
This side-by-side comparison facilitates a comprehensive assessment of the portfolio's earnings growth trajectory against market trends, highlighting whether your portfolio is outpacing, matching, or falling behind the market.
Calculations:
- Past Average - Weighted average of annual percentage growth in past Revenue
- Future Average - Weighted average of annual percentage growth in future Revenue
The Annual Revenue Growth vs Market bar chart provides a comparative analysis of the Portfolio's Annual Revenue Growth with the broader market, encompassing both historical performance and future projections over 3-year periods.
This visual presentation enables a detailed evaluation of how the portfolio's revenue growth has unfolded over time and how it is anticipated to evolve, relative to market dynamics. Such a comparison is crucial in understanding whether your portfolio is surpassing, equating, or trailing behind market revenue trends.
Calculations:
- Past Average - Weighted average of annual percentage growth in past Revenue
- Future Average - Weighted average of annual percentage growth in future Revenue
The EPS Growth vs Market bar chart displays the comparison of Annual EPS (Earnings Per Share) Growth between the portfolio and the broader market, covering both historical data and future projections over 3-year periods. By observing whether the portfolio's EPS growth is outperforming, matching, or lagging behind the market, investors can gain insights into the relative financial health and earnings potential of their investments
Calculations:
- Past Average - Weighted average of annual percentage growth in past Earnings per share (EPS)
- Future Average - Weighted average of annual percentage growth in future Earnings per share (EPS)
Past Performance
Understanding the Past Performance of your portfolio is crucial for optimization. Metrics like Return on Equity (ROE), Return on Capital Employed (ROCE), and Return on Assets (ROA) provide a clear comparison of your portfolio’s profitability and resource utilization against market standards. ROE reflects equity efficiency, ROCE evaluates capital profitability, and ROA highlights asset productivity. Together, these indicators offer actionable insights to identify strengths, address inefficiencies, and enhance the overall effectiveness of your investment strategy.
The Return on Equity (ROE) chart presents a comparison of the Portfolio's Return on Equity (ROE) with that of the broader market. ROE measures a company's ability to generate profits from its shareholders' equity, effectively showing how efficiently equity is being used to produce earnings. This direct comparison of your portfolio ROE vs market aids in evaluating the efficiency of the portfolio in generating profits relative to the market standard. A higher ROE indicates a more efficient use of equity in generating profits, while a lower ROE may suggest the opposite.
Calculations:
Return on Equity (ROE)= Total of (no. of shares x Earnings per share) ÷ Total of (no. of shares x Equity per share)
The Return on Capital Employed (ROCE) chart illustrates the comparison of the Portfolio's ROCE with the broader market's average. ROCE is a vital financial metric that evaluates a company's profitability and efficiency in using its capital. It measures the returns that a company achieves from its capital employed, providing insight into how effectively the invested capital is being utilized to generate profits.
In this chart, the direct comparison of your portfolio's ROCE with the market average offers a clear perspective on your portfolio's effectiveness in using its capital relative to the broader market. A higher ROCE indicates more efficient use of capital in generating profits, while a lower ROCE may point to less efficiency.
Calculations:
Return on Capital Employed (ROCE)= Total of (no. of shares x Earnings before interest and taxes (EBIT) per share) ÷ Total of (no. of shares x Capital employed per share)
The Return on Assets (ROA) chart compares your portfolio's Return on Assets (ROA) to the market average, highlighting efficiency in using assets to generate earnings. ROA reflects a company's profitability from its assets. A higher ROA indicates better asset utilization for income generation, while a lower ROA suggests less efficiency.
Calculations:
Return on Assets (ROA)= Total of (no. of shares x (Earnings per share - Net interest expense per share) ÷ Total of (no. of shares x Total assets per share)
Financial Health
Net Debt to Equity vs Market
The Net Debt to Equity vs Market chart compares your portfolio's Net Debt to Equity ratio with the market average. This ratio measures a company's financial leverage by comparing its total net debt to its shareholders' equity. It's a key indicator of the portfolio's debt level relative to its equity, helping assess financial stability and risk. A higher ratio suggests greater leverage and potential risk, while a lower ratio indicates less reliance on debt financing.
Calculations:
Net Debt to Equity = Total of (no. of shares x Debt per share) ÷ Total of (no. of shares x Equity per share)
Dividends
Understanding the income generation potential of a portfolio is key for investors seeking consistent returns. Metrics such as Portfolio Dividend Yield and Dividend Growth Rate offer important insights into your portfolio's ability to generate income. The Dividend Yield compares your portfolio’s income return to the market average, revealing whether your investments are more focused on generating income or capital growth. A higher yield suggests an income-driven approach, while a lower yield may indicate a growth-focused strategy. Meanwhile, the Dividend Growth Rate tracks the year-over-year increase in dividend payouts, providing insight into the sustainability and strength of your portfolio’s income stream. Comparing these figures to the broader market helps you assess your portfolio’s income performance and growth potential.
The Dividend Yield chart compares your portfolio's Dividend Yield with the market average. This metric offers insight into your portfolio's capacity to generate income. A higher yield indicates a stronger income return relative to the stock price, suggesting a focus on income-generating investments. Conversely, a lower yield may point to growth-focused holdings.
Calculations:
Dividend Yield = Total of (no. of shares x Dividend per share) ÷ Total of (no. of shares x current share price)
The Dividend Growth Rate chart presents a comparison between your portfolio's Dividend Growth Rate and the market average. The Dividend Growth Rate is a measure of the year-over-year increase in dividends paid by the portfolio's holdings. It's a key indicator of a company's financial health and its ability to consistently increase dividend payouts. A higher Dividend Growth Rate in your portfolio compared to the market suggests a robust and growing income stream, reflecting strong company performance and commitment to shareholder returns. Conversely, a lower rate may indicate more stable but slower-growing dividends.
Calculations:
Dividend Growth Rate = weighted average of all dividend growth rate
The Payout Ratio chart contrasts your portfolio's Dividend Payout Ratio with the market average. The Dividend Payout Ratio, calculated as the percentage of earnings paid to shareholders in dividends, indicates how much of a company’s profit is returned to investors as dividends. A higher payout ratio in your portfolio compared to the market might suggest a focus on providing immediate shareholder returns, often characteristic of more established, stable companies. On the other hand, a lower ratio can indicate reinvestment of profits into the business, typical of growth-oriented companies.
Calculations:
Payout Ratio = Total of (no. of shares x Dividend per share) ÷ Total of (no. of shares x Earnings per share)
Note: Holdings with no dividend are excluded from the calculation.
Portfolio Diversification:
Evaluation and Optimization Strategies
Strategies to Optimize Diversification
A well-diversified portfolio spreads risk, allowing gains in one area to offset losses in another.
Ideal Action Plan:
- Analyze industry, holding, and geographical diversification regularly.
- Use charts and insights to identify concentrations or gaps in diversification.
- Develop and adjust strategies to strengthen portfolio balance and resilience.
Evaluating Portfolio Diversification
Effective portfolio diversification is essential for managing risk and achieving stable growth. By spreading investments across industries, holdings, and geographic regions, you can mitigate or minimize specific risks to enhance your portfolio resiliency while optimizing returns.
Overview:
Diversifying across industries helps reduce exposure to sector-specific downturns, balancing risks as industries perform differently under various economic conditions.
Key Insights:
- The Diversification Across Industries Chart shows the portfolio's sector and industry breakdown, identifying concentrations and informing diversification strategies.
- Spreading investments across a mix of industries mitigates risk from underperformance in a single sector.
Strategy:
- Review industry exposure regularly.
- Reallocate investments to maintain a balance across industries.
Overview:
A balanced mix of holdings ensures no single investment dominates your portfolio, reducing risk and enhancing long-term stability.
Key Insights:
- The Diversification Across Holdings Pie Chart highlights the proportional weight of each holding, aiding in identifying major assets and guiding portfolio rebalancing.
Strategy:
- Set target ranges for asset allocations.
- Rebalance regularly to maintain those ranges and adapt to changing goals or market conditions.
Overview:
Geographic diversification evaluates the revenue sources of portfolio holdings, mitigating risks associated with localized economic challenges or regulatory changes.
Key Insights:
- The Geographic Exposure Chart displays the global revenue breakdown of holdings, essential for assessing regional market exposure.
- Companies with diverse revenue streams across regions are better positioned to withstand country-specific risks like market downturns or currency fluctuations.
Strategy:
- Include companies operating globally or with revenue from various regions.
- Regularly review geographical exposure to ensure alignment with your risk tolerance and growth objectives.