There are two key differences with investing in banking and telecommunications. With banks investors are investing on factors such as interest rates, loan approvals and default rates essentially how banks loan your money to others in order to create profit. In telecommunications, you’re investing in equipment, services and communication. For the best investment in any of these industries, a trusted investment company like SG Hiscock is a reliable partner for all of your managed funds.
When looking at banking stock investments we need to look at the profitability ratios for a bank. Since many banks generate their profits from lending activities there are four key metrics to look at how profitable a bank really is:
- Return on Equity – Ideal benchmark of 10% at least. ROE is how much profit a company generates as a percentage of shareholders’ equity, or the amount that would be returned to shareholders if all assets were sold and debts repaid. The higher the ROE, the more efficiently the company is putting the shareholder equity to work.
- Return on Assets – Ideal benchmark of 1% at least. ROA is the percentage of overall profit, or net income, a company makes relative to its total assets (including interest earning loans, securities, cash etc).
- Net Interest Margin – Ideal benchmark of 3% at least. NIM is the difference between the interest a bank receives on loans and the interest it pays on deposits. NIM tends to move in tandem with interest rates. As interest rates rise, so do bank interest margins.
- Efficiency Ratio – Ideal benchmark of 60% or lower. This measures how much of a bank’s revenue is going towards operating costs. The lower the better.
Assessing A Bank’s Risk
Banks are highly leveraged businesses lending out over 90% or more of the deposits they get from customers. As a result, a bank’s ability to perform as an investment is heavily tied to its ability to minimise loan losses, especially during economic downturns (like a pandemic). You need to look at non-performing loans, essentially bad loans. A bank with a NPL ratio less than 2% is not too bad, anything above is cause for concern. The others are net charge offs which is a declaration by the bank that the money lent out will not be paid back.
The telecommunication sector is made up of companies that facilitate domestic and global communication. Think telephones, mobile devices and the internet. There are three sub categories within the telecommunication sector:
- Telecom Equipment – Companies that produce the hardware used for telecommunications, including computers, telephones, radios, transmission lines.
- Telecom Services – Major and growing players in the market, this includes telephone service providers and cable companies.
- Wireless Communication – Mobile network operators, internet service providers and cloud based services dominate this market.
Reasons to Invest in Telecommunication Stocks
The domestic and global economy relies on telecom services more now than ever before. It is a service that can remain in high demand regardless of a global or domestic crisis. It is an industry that will be around for decades. As an investor if you find the right product, service or communication that is currently not in the market and at the ground, level you have the opportunity to make instant significant profit. Even investing in a reputable company will still provide a long term, strong return on your investment.
Finding the Right Telecommunication Company in Which to Invest
Knowing how to assess telecommunication companies is extremely important as there are many out there in the market. The following metrics can assist in evaluating the right company to buy stocks in:
- The size of the company. Companies in this sector need to be large enough to weather the costs of services and network expansion. Low-cap stocks may be appealing, but smaller companies are more likely to fold in this industry especially in an economic downturn.
- A good price-to-sales ratio is important as it compares its stock price to its revenues and can help investors gauge how much other investors are willing to pay per dollar of sales in particular stock.
- The churn rate of the business. The rate at which customers terminate their services with the company or abandon the provider. A high churn rate indicates it is highly likely the company is experiencing difficulty retaining its user base.
Choose Managed Funds that Are Right for You
With all investment funds it is highly recommended that you engage in a company who specializes in the particular field in which you wish to invest. Whether you are an Australian resident or hold a significant investor visa, SG Hiscock has over 20 years’ experience and has a portfolio of established companies driving innovation to ensure a winning return. Get in touch with us online now or give us a call today on (03) 9612 4600