There are a number of different ways in selecting a stock. Some use programs to help them to scan for the stocks that they want, depending on the criteria set in the program. Some will rely on what their brokers told them to buy. But let's put aside all these first and really look at the basics. The article by Stuart Mcconnachie should provide you with a basic explanation on what to look for.
Article: How To Do A Basic Stock Evaluation By Stuart Mcconnachie
There are a few common variables to assess when evaluating a stock:
1) Profitability: Does the company make a lot of money? 2) Growth: past, present, future—major driver of stock price 3) Financial Health: Strong Balance Sheet—the company can weather a storm. 4) Value: the stock is available at a discount (on sale) compared to its historical value, compared to its competitors, compared to its intrinsic value.
1) Profitability: (Return on Capital and Return on Equity) (ROC) & (ROE)
Return on Equity (ROE) (ROE) Low numbers (> 12%), especially if declining, (Look elsewhere) Steadily increasing ROE speaks well of company management.
Measure of profitability Also indicates internal growth potential (ability to self-finance growth without borrowing money or issuing new common shares)
2) Growth: Earnings and Sales Per Share (EPS) Primary determinant of share price movement Rapid and consistent growth is highly desired (harder to manipulate through accounting practices than earnings) Look at Value Line Charts (visual of cash flow growth) issue of more common stock (dilutes EPS)
The next step would be to compile a list of your top stocks and then do a comparative analysis and evaluate the Qualitative variables. This and other strategies are discussed at the best investment advice blog.
Dividend Growth Some companies pay out too much in a good year and then reduce them in a bad year (can hammer stock)
3) Financial Strength Capital Structure: Excessive debt? Shareholder risk increases with the proportion of debt in a company’s capitalization A company with zero debt can’t go bankrupt! (Free Cash Flow Per Share): Cash Flow – (dividends + Capital spending): Capital Spending requirements that deplete CF over long haul is bad, Short term good.
Long Term Debt: Examine long-term debt load in terms of absolute numbers and its trendàstable or declining trend suggests good financial health
Current Position To asses solvency: pay attention to cash and marketable securities; monitor receivables closely. Receivables increasing at rate faster than sales (perhaps some money owed to company is not being collected) Inventories: should not grow faster than sales (Red Flag)
4) Value: High/Low The valuation of a stock relative to its own history: P/E, Price/Cash Flow, Price/Sales, Price/Book Value compare past 5 years (Watch out for cyclical companies) The valuation of a stock relative to others in its peer group: compare to see if stock is above of below where it traditionally sites in terms of the entire market of stocks Quickest way to evaluateà compare cash flow line (the value line) or earnings line to see if company is above or below the line (stocks at or near line may be undervalued)
Parting words from Tompreneuer: Once you are able to grasp the basic, the next step is to come up with your own criteria for stock selection. Of course there are a number of programs in the market that helps to make your work easier. To save you the hassle of having to do a manual selection, then you should invest in a stock selection tool. Look around to find the best fit before buying. For more trading and investment guidance tips, visit Quick and Easy Guide On Investment.
Article Author's Background: A Sauder School of Business Graduate specializing in Real Estate Finance with a vivid interest in the Stock Markets and Stock Investment Strategy. For more information about me and the strategies I implement please visit my blog:
Article Source: http://EzineArticles.com/?expert=Stuart_Mcconnachie
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