When you invest in a stock, you are essentially investing in the company. Hence, as an investor, you should focus on an array of company’s factors that indicate how it will perform going forward. One of the golden rules of stock market investments is to have a strong reason to buy a stock. New, as well as old investors, should always try and understand the company fundamentals before buying the stock. The company fundamentals consist of various sectors like balance sheet and different financial ratios. These factors should be taken into consideration before buying the stock. In order for a stock to yield better long-term returns, you have to understand the basic company fundamentals.
Here are the top 7 indicators that will give you an idea of the company’s performance:
- The balance sheet: As an investor, a balance sheet of the company reveals its assets and liabilities. It offers a clear look at the company’s financial position in terms of its assets and its debts. The current and noncurrent assets of the company should also be considered. Make sure to learn about the different liabilities (current and long-term) of the company. You should also look at the shareholders’ equity which is essentially the initial amount of money invested into a business. Finally, a strong cash reserve suggests the company is performing strongly.
- Price to earnings ratio: Every investor should understand a couple of financial ratios of the company, for this, they should checkout the P/E ratio of the stock that suggests how much amount stock investors are paying. It is a measure which indicates if the company is overvalued or undervalued. P/E ratio is calculated by dividing the current market price of a company’s stock by its earnings per share, also referred to as EPS. You should always compare P/E ratios with P/E ratios of other companies in the same sector.
- Debt to equity ratio: The debt-to-equity (D/E) ratio is used to measure a company’s financial leverage. It shows how much debt a company is using to finance its assets in relation to the value of shareholders’ equity. The D/E ratio is dividing a company’s total liabilities by its stockholders’ equity. A high D/E ratio suggests that the company has been aggressive in financing its growth with debt.
- Operating cash flow: Make sure to keep a tab on the cash flow of the company as it is more important than the income statement. A higher operating cash flow indicates that the company able to sustain the capital investment. The operating cash flow indicates whether a company has the ability to generate sufficient cash to maintain its operations. A low operating cash flow indicates that the company may require external financing for capital expansion. Taking a look at the cash flow will help you take a sound decision about your stock investment.
- Profitability: You should put extra focus on whether the company is making profits. As an investor, it is important that you understand if the company is generating enough profits and whether it is going for a tweak in the business model. It must be noted that the company you are investing in should have better margins as compared to its peers.
- Goals and strategies: It is also important to check from time-to-time if the company is working towards its fixed expansion plans. The stock may perform well if the company is launching a new product or is foraying into a new merger or venture. You should keep an eye on how the company has positioned itself against the competition.
- Key management changes: Along with the aforementioned financial ratios, it is equally important to check whether the company has a strong management team. A well-equipped management team shares the same vision of the company and leads to its growth. In order to get premium valuations in the market, a company should follow the highest standards of transparency and disclosure. Therefore, as an investor, you should keep a tab on the company’s management related updates.
Investors should always have a strong reason to buy the stock of a company. All the aforementioned points should be taken into consideration before investing your hard-earned money into company stocks. It must be noted that stock investments are not your ticket to make instant money.
There are numerous websites which provide information on top stocks performance like nifty 100, nifty 50, nifty midcap 50 etc one of them is Bankbazaar.com. Stock market investment requires a little bit of hard work and patience. Hope all the above points will help you make a sound decision when it comes to selecting stocks. If you want to know more about stocks, check out websites like BankBazaar.com that offer in-depth analysis of various companies’ stock performance. In the end, if you think that stock market investments are overwhelming and tedious, you can always consider investing in mutual funds.