LONDON -- When weighing up a potential investment, we need to look forward rather than backwards. If you buy a stake in a business, it's the future profits that count -- and the stock market will value your shares based on future expectations.
With that in mind, it can be helpful to review what expert City analysts are expecting a company to earn in the coming years. These expectations can be compared to the share price, to give you a better idea of how the stock market is valuing the business.
Today I'm looking at the earnings per share (EPS) forecasts for HSBC (HSBA) (HSBC 0.12%), the FTSE 100 banking giant. All my figures are courtesy of S&P Capital IQ.
Analysts expect HSBC's profits to be 65 pence per share this year. This means that compared to today's share price of 736 pence, the market is valuing HSBC's shares on a forward price-to-earnings multiple of 11.
Looking ahead, the consensus then calls for an improvement in HSBC's earnings to 69 pence per share for 2014 before jumping to 75 pence in 2015. The data indicates HSBC's revenues meanwhile might grow more slowly however, from £68 billion currently to £74 billion by 2015, annual growth of around 2.3%.
The analyst forecasts for HSBC range far less wildly than estimates for the likes of Lloyds and RBS, where far greater speculative elements enter into analysis. But does this indicate that HSBC is less complex, and a good buy at the current price, or is it just as difficult to value as the other banks?
Whether these projections and the current valuation make the shares of HSBC "fairly priced" is for you to decide.
While HSBC's 4.6% prospective dividend yield is impressive, if you're looking for an even higher-yielding investment, you may want to take a look at "The Motley Fool's Top Income Stock for 2013."
The Fool's choice recently revealed its dividend would increase "at least in line with the rate of U.K. inflation," and provides a market-beating 5% yield.
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