Start With What You know: A Beginner’s Guide to Making Stock Investment Decisions - Deepstash
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What To Look For When Examining A Company For Investing

What To Look For When Examining A Company For Investing

  • Consistency
  • Trends
  • Intrinsic meaning
  • Competitive Comparisons

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Consistency

Consistency

The hallmark of good management, as well as of an attractive long-term investment, is the consistency of results delivered. If profit margins are consistent and changing at a consistent rate, the company is predictable — and most likely in control of its markets. Inconsistent ratios reflect inconsistent management, competitive struggles, and cyclical industries, all of which diminish a company’s intrinsic value.

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Trends

Trends

Better than consistency alone is consistency with a favourable trend. Growing profit margins, return on equity, asset utilization, and financial strength are all very desirable, particularly if valuation ratios (P/E and so on) haven’t kept pace. Value investors who study trends carefully have information that most investors don’t have.

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Comparisons

Comparisons

 For many analysts, and especially credit analysts, who are trying to get a picture of a company’s health, a comparative analysis is the most important use of ratios. A ratio acquires more meaning when it’s compared to direct competitors, the company’s industry, or much broader standards, like the S&P 500.

A profitability measure, such as gross profit margin, reported at 25 percent tells more when direct competitors are at 35 percent plus.

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Intrinsic Meaning

Intrinsic Meaning

These numbers tell you something without looking at any comparisons or trends. Want an early test for determining whether a ratio is good, bad, or ugly? hink of the company’s ratio as it would apply to your personal finances.

A household with 3 times as much debt as equity is in dire straits, as is a household that turns over inventory (say, groceries) only once a year, as is a household that achieves only a 2 percent return on its investments, or a household that’s owed a third of its annual income. You can’t apply this test to all ratios, but where common sense tells you something, use it!

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CURATED BY

royaltouchz

Writer, artist, Accountant and a forever learner. Learning, loving, Hoping.

CURATOR'S NOTE

These ideas show how you can make sense of financial data from 4 different angles.

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