Financial Statement Factors To Look Into When Considering A New Stock

 

New investors are often interested in choosing new stocks but are often overwhelmed by the sheer volume of different stocks out there to choose from. There are, after all, a wide range of different stocks and industries that you can choose from. Finding the right stocks can be difficult but can be made easier by understanding certain trends regarding stocks and doing some financial statement analysis on the stocks you are choosing between.

 

For many people, looking into financial statements can be a real challenge and there are many websites that accumulate ratios and other relevant data in a more digestible form. Here are certain factors that you should look into when choosing between different stocks.

 

1) Price to Earnings Ratio: A price to earnings (P/E) ratio will tell you how many times earnings a specific stock is trading for. This will show you, that if the company does not increase their earnings, how many years will it take for the stock to earn back the amount that you pay for it. While this can be a useful figure in a mature industry that is not changing significantly, it can be a bit distorted in newly developing industries that are growing significantly and when a company still has a loss. On an overall basis, it is commonly thought that a P/E ratio of above 15 is historically expensive while below 15 is relatively cheap.

2) Free Cash Flow: A free cash flow figure is on a company’s cash flow statement and basically shows the cash flow from operations plus and capital investments. The importance of a free cash flow figure is the cost that is required to sustain a business each year and the figure will show how much money is available to make investments by a company as well as the amount that is available for further investment or expansion, stock buybacks, or debt repayment. In other words, how much money is available for a company’s management to invest in other things or to give money back to shareholders.

3) Debt to Equity Ratio: A debt to equity ratio will show how much debt financing a company has in comparison to an equity investment by shareholders. Here, neither figure is particularly good or bad but needs to be taken into context with other factors. A high debt to equity ratio may show that a company is in deep debt and unable to sustain itself, or may show that they are taking into account low interest rates and using this cash flow to repay shareholders by buying back stock. If a company has a particularly high or low debt to equity ratio, you should learn what led to this as well as the prospects of the company in order to learn about whether it is a good idea to invest.

 

4) Net Income: Net income shows how profitable a business is in a given period. While this is an important figure to track in a stock, particularly over time, it can be distorted seasonally or in other contexts, and often needs to be taken in as part of a large context.

 

Despite all the aforementioned information, different industries have different factors that are important. Net income may be an important factor in most industries but it provides a distorted view in certain industries such as telephone utilities and real estate companies which may have a significant amount of depreciation that is not reflective of profitability and success.

 

Ultimately, individual care and learning the industries of the companies that you are investing in is the best way to first learn about, and then invest in, a new stock.

Is The Stock Market For You?

Warren Buffett, the second wealthiest person in the United States, purchases his first stock at the tender age of 11 and from there, went ahead to make a killing in the stock market. And he’s just one of the many people who has made a killing investing in public company stocks, the likes of which include Tim Grittani, who became a millionaire at 24 by investing smartly in penny stocks and Chandresh Nigam who made it big selling IT stocks. So how does this work and how would you go about it?

The stock market, also known as the equity market is a place where companies which open their shares to the public sell the same in the form of exchanges or the over-the-counter market. This is important to the free-market economy, as it provides businesses with the capital they need to grow while letting investors get a slice of the company ownership, sharing in both the profits and losses.

 

In older times, stock trading was a slower and tedious process, with physical share certificates being the only proof of ownership of a share, but today electronic shares allow for fast trading with a phone call or email.

There’s no harm in the quick short selling of stocks if that’s your goal, as is the case in day trading of shares for a quick profit. Doing your research on quick growth trends of companies will help you take an informed decision.

 

As for long term investments, many beginners make the mistake of blindly looking for the cheapest stock options to buy and wait for them to hit low price points. Long term investments can also pay off when you put down money on a company you believe will grow in the long run based on the nature of the industry and their performance over time, as the stock itself will have high selling and low selling points, but a well-performing company will tend to show an upward trend in growth and stock value over a long period.

 

Don’t let your ego get in the way. If you go into losses and your objective projections for the company aren’t good, cut your losses, accept the failure and move on. There is a trend of people who tend to sell stocks that have made profits while holding onto the ones that are in losses, and go on to look for more options. It’s important to appraise your stock realistically, rather than putting it aside in the hope that it will rise as this behavior could land you in serious losses over time.

 

You also need to constantly keep yourself updated with the political and economic environment and its consequences on the industry you’ve invested in. Technology changes rapidly as well, and sometimes there’s not as much market data available as is the case with businesses using more traditional means. Many silicon valley startups have become billion-dollar industries in the own right overnight, and there is much to be made in profit from investing in new tech, just make sure you do your homework regarding similar kinds of business models and make projections based on that data.

 

Don’t put money on hearsay and hype. Many companies will make big promises which they aren’t likely to be able to live up to, and it is up to you to identify such situations.

 

It’s also a good idea to stick with stocks that have a lot of trading activity like the ones that are illiquid tend to show relatively fewer upward trends as a whole. All the best!