Asked on 24 Apr 2019
Hello! Here are some of the financial ratios that you may want to look at when deciding which stock to buy!
1) Price/earnings ratio
The P/E ratio would be able to tell you the dollar amount that an investor can expect to invest in a company in order to receive one dollar of the company's earnings. It will also be able to tell if a company's stock is overvalued or undervalued.
The beta is used to measure the volatility of a company's stock. A beta value of more than 1 is considered high which means that it is likely to be of high risk. While any value lower than 1 would be considered low, meaning that it is likely to be a low risk.
Looking at the dividend rate may also be a good idea if you are looking for a stock that will enable you to make money without constantly watching the stock market.
Hope this helps!
Lum Jun Xiong, Banking and Finance at Nanyang Business School
Answered on 25 Aug 2020
Business Model is important. How the company makes money is what drives the stock price. And the potential growth of the company and the industry its in. Other than business model, you can analyse its cashflow as cash is king. It tells you a better story which businesses is making money in terms of cash.
I would recommend developing a framework on how to identify an ideal investment based on your risk profile. With a framework in place, you'll have an idea of what a good stock should look like and you'll be more objective in terms of identifying potential investments. Your thought process will be clearer and you'll be able to eliminate "noise" in the market.
Personally for me, I rely on a 5-step process to select potential stock:
1) The right business
2) The right management
3) The right price
4) Margin of safety
5) Circle of competence
As you can see, my focus is not only on finding the perfect business but the whole process of stock selection from business to valuation to competence. It is a holistic approach. In my blog, I dive a little deeper into each step. You can read it here.
Perhaps you would like to elaborate more on what are the stocks you are looking at?
Personally, I would do some form of Peer Comparison within the industry since each industry would differ in terms of the metrics to look at. For example, if i were looking at FMCG companies, I would tend to look towards their Inventory turnover ratios.
Generally, before deciding on any company to put my money in, I would look at the following metrics:
1) Revenue Growth
2) Net Profit Growth
3) Debt to Equity
4) Cashflow from operations
5) Cashflow from Investing
6) Company's Management
7) Growth Prospects
8) How the Assets, especially fixed assets like properties are classified? (Whether its marked to market, or based on initial cost)
9) Any other industry specific indicators