The following updates are examinable from 1 April 2022


  • Dates and data updated
  • Material added relating to Evaluating Equities, Metrics for Stock Selection, and Virtual Assets:
Profitability Ratios
  • The following ratios measure profitability:

Return on assets (ROA)

Return on equity (ROE)

Return on capital (ROC)

  • ROA helps investors measure how management uses the company’s assets to generate income. This ratio is useful for comparing companies in the same industry
  • ROE shows the return an investor is receiving on equity invested. This measure can be used across industries
  • ROC measures how efficiently a company uses total capital invested to generate profit from day-to-day operations. Gains or losses on non-operating assets are not included
EBITDA Multiple
  • This multiple is similar to the PE ratio, except we are looking at the enterprise value (EV) of a share instead of the market value of a share
  • EV =  market value of equity + total debt – cash
  • The earnings figure considered is earnings before interest, tax, depreciation and amortisation (EBITDA) which is a proxy for cash generated before financing costs and tax

Analysts use the EBITDA multiple to identify companies that cheaper or more expensive in terms of operation income

 Metrics for Stock Selection
  • Many investors use their own metrics for stock selection or to monitor stocks in their portfolio
  • Some investors prefer stable income, with positive earnings per share each year over a five-year period being an example of a relevant metric
  • PEG = P\E /Earnings per share growth
    • A low PEG means a low P\E ratio but a high growth rate – could be an undervalued growth stock
    • A PEG less than 1 could suggest selling the stock would be a good idea
  • Metrics that indicate low-risk stocks would be:
    • Low debt-to-equity ratio
    • Low beta
    • Large firm size
  • Metrics that indicate high-risk stocks for optimistic investors would be:
    • High debt-to-equity ratio
    • High beta
    • Small firm size
Virtual Assets
  • In the virtual asset market, there is a wide range of available products, with most trades supported by distributed ledger technology (DTL)blockchain is a type of blockchain
  • DLT enables direct transactions between individual buyers and sellers without the need for financial intermediaries – eg banks & securities firms
  • SFC has identified significant risks associated with virtual asset investing such as lack of generally accepted valuation principles and illiquidity as well as cybersecurity and safe custody of assets
  • Under SFC regulations, offering and trading of security tokens are limited to professional investors and should comply with the SFO
  • SFC published “Proforma Terms and Conditions for Licensed Corporations which Manage Portfolios that Invest in Virtual Assets” in October 2019
  • The first virtual asset fund tracking the price of Bitcoin was launched for professional investors in April 2020
  • Since 2021, China has banned all onshore businesses related to non-official cryptocurrency
  • Material also added relating to ESG Funds and Private Credit funds:
ESG Funds
  • Environmental, social and governance (ESG) funds aim to invest in assets that meet certain ESG criteria
  • Environmental criteria focus on assets that:
    • Make the natural environment better
    • Provide solutions to climate change
    • Improve waste treatment to reduce pollution
    • Increase forestation
  • Social criteria focus on assets that:
    • Deal with social and community problems
    • Improve health and safety
    • Promote employee diversity
    • Consider underprivileged groups
  • Governance criteria focus on assets that:
    • Deal with executive pay
    • Deal with audits
    • Deal with internal controls
    • Deal with bribery and corruption
    • Deal with shareholder rights
    • Deal with corporate board diversity
  • ESG funds are attractive to investors who want their investment to generate returns and have ESG impacts on society
  • In Hong Kong, an ESG fund is required to disclose in its offering document information regarding its ESG focus, ESG investment strategy, expected minimum proportion of ESG investment and related risks
Private Credit Funds
  • These funds invest in private loans, non-publicly-traded debt securities, distressed debts, credit-linked notes, collateralised debt obligations and other credit derivatives
  • Private credit funds tend to provide stable and lucrative income during economic booms, but lose badly in economic downturns
  • Under normal economic conditions, returns are not strongly correlated with equity returns and provide diversification benefits


  • No additions or changes


  • Minor changes


Leave a Reply

Your email address will not be published. Required fields are marked *