If you are thinking in buying a share, make sure first you understand what it is, and then get yourself time to research and collect information about how this company is doing. We think that most of our equipment for the journey to our #imapGoal should be composed by funds, but if we see an opportunity that fits to our profile and to our goal, then we should be prepared with some information to make the decision.
What is the company ability to generate earnings from its revenue?
Operating income, earnings from business's operations after deducting operating expenses, reflecting the results of the typical business of the company.
Net profit margin, it reflects how much of each dollar of the operating income is translated into profit, after paying all the costs.
ROA is the net income (profit from business's operations after deducting non-operating expenses) over the total assets of the company, showing how efficient a company is at using its assets to generate earnings.
ROI is the amount of return on an investment relative to the investment’s cost, and it is used to better understand how well a business is doing and which areas could be improved.
EPS is the company's profit divided by the total number of shares. It tells you how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value.
How quickly can the company repay its short-term debts?
Current cash flow shows how a company can maximize the current assets to satisfy its current debt and other payables. It measures a company's ability to pay short-term obligations.
Operating cash flow shows how a company can use only cash flow from operations to pay current obligations. A solid cash statement where you see that the company is generating money with a prudent investment.
How well can the company deal with long-term financial obligations?
Total-debt-to-total-assets is the amount of debt relative to assets owned by a company. This information can reflect how financially stable a company is. The higher the ratio, the higher the risk of investing in that company. A debt greater than assets must be avoided.
Times-interest-earned shows how many times a company could cover its interest charges with its pre-tax earnings. company's ability to meet its debt obligations based on its current income.
How inexpensive or expensive the company is in the market?
Price-to-book compare the company market value to its book value (value given by the company based on their estimation of benefits). We need to check that benefits are not overestimated, so we don't fall in risk traps of a downward revision of its book value.
Price-to-earnings measures the current share market price relative to the company EPS. It is used to determine the relative value of a company's shares or to compare a company against its own historical record. We need to be careful not too fall in the value trap in companies that seem cheap and are always cheap because the benefits are overestimated.
Dividend yield shows how much a company pays out in dividends each year relative to its stock price. We should look at dividends paid with cash which do not require devaluations or rate cuts to generate higher returns.
Security margin refers to the price we pay to buy a share in reference to its intrinsec value: there are no good or bad shares, there are only cheap shares and expensive shares. Even the best company's shares become candidates for sale when their price rises too high, whereas it pays to buy shares in the worst company if their price falls enough.
For all the previous numbers and ratios, we should not only look at the last year results but also at the 3- and 5-year averages. In addition, we have to use all this information in tandem, not separately, and in context.
Other company and contextual information
Management. Who is managing the company is one of the more important things to look at, as their decisions will have a huge impact in the price and dividend that we will get.
Context, like the currency and sector of the company can affect to the risk we held, and the country can ease the information that we have available to make decisions
These are only some basic indicators. Depending on the company industry and how deep you want to dig, you may need to look at other indicators, like for example the EBITDA, enterprise multiple, ROCE or cash ratio. You can read Security Analysis written by professors Benjamin Graham and David Dodd of Columbia Business School if you want to master this part and you are willing to spend more time to get more confidence and security in your decisions.
Does this look a lot of work? Learn how using funds can help you simplify this process and save lots of times and headaches. And remember, whatever the equipment that you choose for your journey, always understand what you are doing.
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