After working in finance over 6 years and hosting 5,000+ hours of Spaces…
I’ve found there are consistently 15 metrics I consider for each stock I invest in.
Here’s a breakdown of them in plain English:
1) Strong Management
Poor management can destroy great businesses.
And strong management can make an average company great.
Strong management looks like this:
• CEOs w/ decades of experience
• Compensation aligning with the industry
• Management personally invests in company stock
2) Growth Prospects
Figure out a company’s growth prospects by asking:
• New industry?
• Declining industry?
• How’s customer sentiment?
• How’s customer acquisition?
• What sales strategies are used?
• Will they stay in the same market?
Growth potential = Potential returns.
3) Customers
Do they have a diversified customer base?
This:
• Hedges against competition
• Allows company to reinvest
• Helps meet debt obligations
A business with multiple customers is safer than one that’s exposed to an unreliable market.
4) Outside Impact
What factors outside of the company’s control can impact it?
Think:
• Lawsuits
• Govt policy
• Competition
• The economy
Understand the impact they have to understand a company’s future.
5) Innovation
Businesses should improve with technology.
If it doesn’t, it loses market share to a competitor.
Companies that leverage new tech are more versatile and adaptive.
This makes them attractive investments.
6) Moat
Aka competitive advantage.
Here are some to consider:
• Size
• Patents and IP
• Barriers to entry
• Production costs
• Customer loyalty
A sustainable advantage increases your chances of profiting.
7) Stable Market
Volatile markets make it difficult to exit a position.
It’s hard to time it right.
And when it’s hard to time an exit you risk compromising on your return.
That’s why I prefer stable industries over cyclical ones.
8) Cash Flow
When evaluating cash flow, ask:
• Are they subject to economic cycles?
• Can the cash flow cover debts?
• Does the company have a subscription service and/or a low churn rate?
Questions like this will help you determine a company’s profitability.
9) Quick Ratio
This will tell you if a business has enough assets to pay upcoming debts.
Equation:
Current assets ÷ Current liabilities = Quick ratio
A quick ratio of 1 is normal.
But in general, you want a quick ratio above 1.
10) Net Profit Margin
This shows you how much money a company makes for every $1 in sales.
In other words… profit.
This helps you determine whether there are healthy profits and if operating costs are reasonable.
Equation:
Net income ÷ Revenue = Net profit margin
11) Return On Assets
ROA shows you how efficiently a company uses its resources to generate profits.
But it varies from industry to industry.
So the best way to find a good ROA is to compare it with companies in the same industry.
Equation:
Net income ÷ Total assets = ROA
12) Earnings Per Share
This shows how much money a company makes per share of stock.
The higher the EPS the more valuable the company.
Equation:
Profit ÷ Outstanding shares = Earnings per share
13) P/E Ratio
It shows how much a company is worth & how much investors are willing to pay for each $1 of earnings.
High P/E ratio = stock is overbought or investors are bullish.
Low P/E ratio = stock is oversold or investors are bearish.
Equation:
Share price ÷ EPS = P/E ratio
14) Price To Sales Ratio
Applies mostly to growth stocks with no profits.
The lower the price to sales ratio, the more attractive the investment is.
Equation:
Market cap ÷ Annual sales = price to sales ratio
15) Enterprise Multiple
Shows how a company would be viewed before a potential acquisition.
A good or bad multiple varies from industry to industry.
So compare it with other companies in the same industry.
Equation:
Enterprise value ÷ EBITDA = Enterprise Multiple
There you have it!
The 15 metrics I consistently review before investing in a particular stock.
Image and article originally from www.benzinga.com. Read the original article here.