Danmarks Nationalbank, the Central Bank of Denmark, is responsible for maintaining price stability and supporting economic growth.
However, in addition to this responsibility, Danmarks Nationalbank also has other tasks such as issuing currency and managing foreign reserves. When entering any trading market, you must learn to properly investigate and analyse the fundamentals to minimise your trading risk.
History of the Danish Krone
Before 1989, the Danish currency was pegged to other European currencies based on a basket of these currencies.
After introducing the euro, Denmark held a referendum in 2000 to decide if they wanted to adopt the euro. The majority of the population voted against adopting the euro, so Denmark retained their krone currency.
In 2005, Danmarks Nationalbank set up a foreign exchange intervention mechanism to defend the krone’s peg to the euro.
This foreign exchange intervention policy has been influential in the following years with a growing current account surplus, increased foreign exchange reserves and a dwindling supply of krone.
In 2012, the European Central Bank announced that they intended to undertake large scale purchases of government bonds as part of their new Quantitative Easing (QE) programme.
In response to this, Danmarks Nationalbank announced its QE programme in February 2014. This was the first time Danmarks Nationalbank intervened in the government bond market since the early 1990s.
The central bank’s objective was to defend the krone’s peg to the euro and ensure that Danish borrowers continued to have cheap financing.
The Danish Financial Market
The financial market is full of investments that you can use to diversify your portfolio. You may be familiar with indices like the S&P 500, which tracks the progress of the most prominent American companies, but what about the Danish market?
To determine whether or not you should invest in Denmark, it’s essential to understand its fundamentals analysis.
Fundamental analysis is a technique used to measure a company’s intrinsic value by examining its financial statements.
The most critical indicators to look at are earnings per share (EPS), the price-to-earnings ratio (P/E ratio), and free cash flow. Follow Saxo for more information on fundamental analysis to help improve your CFD trading strategies..
EPS
The EPS measures how much profit a company generates for each share of common stock it has outstanding.
Earnings are a vital valuation tool because they show how much money a company makes with the resources at its disposal.
High EPS numbers indicate that a company has strong fundamentals, which is why it’s helpful to look at earnings per share to evaluate long-term returns.
The higher the number, the more shareholder value is created for each share.
On the other hand, a low EPS is a danger sign that indicates that a company may not be putting resources to practical use.
This is very troubling from an investment perspective because it means there’s little growth potential and makes the stock overvalued relative to others in its industry or sector.
The current annualised earnings per share for Denmark is about $4.50. While this number is not as high as some of the larger markets globally, it is still relatively stable and shows that there is potential for growth in the Danish market.
Price Per Earning Ratio
The price-to-earnings ratio (P/E ratio) is another essential measure to look at when assessing an investment.
This ratio compares a company’s stock price to its earnings per share and gives investors an idea of how expensive or cheap a stock is.
A high P/E ratio indicates that a company’s stock is overvalued, while a low P/E ratio means the stock is undervalued.
It’s crucial to note thatP/E ratios vary significantly between different companies and should be used only to compare similar companies within the same sector.
Denmark’s P/E is currently around 29.7 times, which means that for every $1 of earnings the company makes, investors are willing to pay about $29.70—a high number compared with other countries.
This indicates that investors believe there is potential for significant growth in Denmark, and as a result, the stock may be overvalued.
Free Cash Flow
The final indicator to look at is free cash flow. This measures how much cash a company has available to pay dividends, buy back shares, or reinvest in the business.
Free cash flow is an essential measure of financial health because it shows whether a company can generate cash on its own without taking on more debt.
Since management doesn’t control it, free cash flow is also the most challenging number to manipulate.
The free cash flow for Denmark is roughly $11 billion. This figure is relatively significant but not as high as some other economies.
In Summary
When considering an investment in Denmark, it is essential to read a fundamental analysis to understand the underlying business.
It will give you an idea if the company is strong and has a good chance of success or struggling and may not be a wise investment.
