To assist you in creating a watchlist of possible investments, we discussed how to locate stocks that you comprehend, have meaning for you, and are competitive in their industry in the previous chapter.
This is where the research ends for the majority of individuals. They invest their money in the market irrationally and pray for the best.
This approach has flaws, chief among them being that it needs to assess a company's financial stability. Using economic measures to evaluate a company's worth as an investment and potential for future profit is crucial.
Why Stock Metrics Matter
Stock metrics are used to evaluate, contrast, and monitor stock performance. These measures are recognized as a quantitative evaluation technique. Value investors and financial planners also use them to create a picture of a stock's performance.
In addition, equities may be frequently evaluated using this information to track their performance and develop long-term investing plans.
When selecting an investing plan, a wide range of stock measurements may be employed to great advantage. These investment criteria have been created over time to enhance effectiveness and adhere to industry norms.
THE KEY METRICS TO VALUE A STOCK
By calculating these financial parameters, you can determine if the company you are considering is reliable and capable of generating excellent returns year after year.
1. Return on Capital Invested
Return on Invested Capital (ROIC) should be the first of the "Big 5 Numbers" that you consider (ROIC). This is the annual return a company receives on the money it invests in itself.
The ROIC gauges how well a business uses the money to generate profits. It is the single most significant indicator of how successfully a firm is doing, and it offers invaluable advice on whether you should consider investing in that business.
2. Sales Growth Rate
The Revenue Growth Rate, often known as the Sales Growth Rate, is a relatively simple concept. It is the pace at which a company's overall revenue increases (or not) year over year.
3. Growth in Earnings Per Share
Earnings Per Share, often known as EPS Growth Rate, is the third of the Big 5 Numbers. This figure illustrates the trend in how much the company is making per ownership share over a specific time frame.
Net profit is divided by outstanding shares to determine earnings per Share (EPS).
4. Equity Growth Rate
The equity growth rate demonstrates whether and by how much a company's equity has increased or decreased over time.
Why is it essential that a company's equity is increasing?
The fact that a company's equity is increasing suggests that it has enough extra cash (after paying its bills) to invest in equipment that will boost future sales.
5. Rate of Operating Cash Flow Growth
The Operating Cash Flow Growth Rate is the last financial indicator to consider. This gauges the growth rate of operational cash, and the amount of money that enters the bank due to company activities.
FINAL INSIGHT
Remember that choosing a firm you enjoy is just one aspect of making a wise purchase.
Financial metrics must be used to evaluate a company's financial standing for you to feel confident in its future performance and, consequently, the success of your investment.
