You might have enough money in your hand to start investing in stock and generate more cash flow. But as financially capable as you are, you might be clueless the important things to consider in picking good stocks. Choosing stocks that worth investing is not as easy as picking any stocks from the stock exchange. Here are the three key financial ratios I used myself in evaluating stocks:
Minimum 10% Earnings per Share Growth Rate (EPSGR)
EPSGR is an incremental value of Earnings Per Share (EPS) at specified timeframe; which normally done on annual basis. Stock with the highest EPSGR grows the fastest in that year than the other competitor in the same industry. Consistently giving 10% EPSGR is a good indication that the company has excellent products with great demand and economies of scale. However, it would be better if you manage to find stocks with 15% EPSGR.
Minimum 10% Return on Equity (ROE)
Return on Equity (ROE) is a comparison of the company's net profits to its shareholders equity. ROE tells you how much you can gain if you had decided to invest in the stock. Companies with more than 10 per cent ROE have the ability to utilise their shareholders' money for maximum profits. You should not buy stocks that have ROE less than 5% as you can get the same return with zero risk with cash deposit. After all, what is the point of taking greater risk and yet get the same return?
Maximum 60% Debt to Equity Ratio (D/E)
D/E shows you how much debt the company is using to finance its business operation. You can calculate it by dividing the company's total debt by the total number of equity. You will know if the company is heavily funding its operations from debt should its D/E is greater than 1. This will give you some picture to how sensitive the stock is from the rising interest rates. Nevertheless, there are capital intensive industries which require huge financing from others due to their business nature.
You must consider these key financial ratios altogether as they define just how much valuable your investment would be. Picking one with no business quality at all, just do not make any sense to me. But don't forget to use some qualitative methods as well in finalising your stock picks. After all, picking good stocks requires homework and effort. Trust me, it is well worth it.
Bonds and preferred stocks are essentially defensive investments. They aim to protect the invested funds, but they are not designed to advance or to expand in value. For really flexible investment and substantial opportunity for capital gain, the security for you to look at is the common stock. It had quite a time becoming "accepted," but now it has not only arrived, it is acclaimed as not only almost the ideal investment, but one uniquely equipped to make you rich if you happen upon the right selection.
In spring 1960, there were thirteen million stockholders in America. Their number had doubled in a single decade. Yet there was a time a half-century earlier when stocks were regarded as highly speculative; and investment in them was considered suitable only for businessmen and bold sportsmen or gamblers.
Then the fashion changed and in the Roaring Twenties almost everybody got interested in the stock market: the grocer, the elevator boy, the nurse, the college professor, as well as the rich and resourceful. But most of these newcomers to the stock market were buying stocks for the wrong reason. They were buying purely for speculation.
They paid little note to such basic things as earning power, dividend rates, possible over-expansion of an industry, or the overcapitalization of a company. All they were out for was a fast buck. And often, lacking enough money to work with, they borrowed bought on margin. They put up $500 of their own money and borrowed $4,500 from a broker to purchase stocks costing $5,000.
With a 10% rise, their own money doubled; but with a 10% loss, they were either sold out, losing everything, or were asked to put up more money, which in many cases they didn't have. Either way, they were in trouble. Their cupidity and stupidity had done them in.
All of this gave the stock market a bad name; and it took several years for lessons learned at great pain and cost to sink in. Over the years, however, the true worth of common stocks has become understood, and thousands of individuals have prospered by buying outright (not on margin) the stocks of such fine companies as IBM, American Tel. and Tel., Consolidated Edison, General Foods, du Pont, General Motors, etc.
Not only economists and financiers but people in all walks of life have found good common stocks to be rewarding investments, providing increases in dividends to compensate for the declining purchasing power of the dollar, and rising net worth as stocks advanced in price in response to sustained growth in earnings.
Common Stocks Gain Acceptance
So common stocks are a good thing. The amazing growth in size, financial stability, earning power and dividend-paying capacity of hundreds of fine corporations have made their common stocks desirable and dependable long-term-investments. Thus today not only individuals but trustees, investment trusts, insurance companies, savings banks, and endowed institutions are all substantial holders of common stocks.
Now you know their value, it is perhaps time for you to invest in some common stock. Good luck!
Both Zainul Anuar & Jimmy Cox are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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