Nobody buys a car without comparing prices between automotive dealerships or without test driving the vehicles that appeal to them. You wouldn’t proceed to the checkout of a grocery store without inspecting the expiration date of a loaf of bread or carton of milk either. Buying a stock requires the same diligence you implement when buying a car or shopping for groceries.
Stock research is your due diligence as an investor. You want to ascertain as much information about a company to see if they warrant your capital investment. It is one of the utmost important process in investing and should not be neglected. You don’t want to invest in a company just because you like them; you want to invest in a company because the company’s fundamentals are superior to other stocks. With thousands of companies to choose from, conducting investment research will help lead you to these great stocks.
A great stock is a stock of a company with healthy financial statements. Financial statements can be broken down into several categories which are important to you as an investor. To find a great stock you will conduct stock research and look for companies that possess one or more of these key financial statistics:
PROFIT MARGIN
Believe it or not but the average profit margin for companies in America is 7%. When conducting your stock research you always want to look for companies with a positive profit margin. Obviously, the higher the profit margin, the better. I am a very picky investor and look for stocks with profitability in the double digits. I tend to set my stock research criteria around the world’s greatest investor and second richest man on earth, Warren Buffett. It was written that Warren Buffet set’s a benchmark of a 25% profit margin when looking at a company’s profit margins. The reason you and Warren Buffett want to invest in a profitable company is because companies tend to share their profits with investors. Profits can either be shared directly via a dividend or indirectly from the company shareholder value increasing in price. If a company has no profits then you won’t be receiving a dividend or be the owner of a stock which increases in value. Pay attention to profits, they helped make Warren Buffett a billionaire.
RETURN ON EQUITY & ASSETS
If I gave you a foreclosed house for free what would you do with it? Would you simply let the house sit there empty? Would you rent it out and generate a capital return? Would you renovate it and sell it for profit? As an investor you want companies to create a positive return on their equity. If I gave you a property for free, I’d expect you to do something positive with it and create money for the both of us. The same applies for corporate America so you want to invest in a company that is creating positive returns on company assets. You don’t want those assets withering away and creating negative equity like a house just sitting empty on main street. 25% can be your benchmark for a company’s return on equity as well but at a minimum look for a positive number here.
LIABILITIES LESS THAN ASSETS
Liabilities are one of the biggest hindrances for an investor. You want to be certain that a company has less liabilities than assets. If the opposite is true, your likelihood of flourishing from investing in that company is slim. When a company has liabilities, they have obligations to those liabilities. Instead of your stockholder equity increasing, the company will have to use capital gained to get rid of its liabilities. One of the biggest liability of a company is debt.
DEBT
As a person, you know debt is a bad thing. Credit card debt is the biggest insidious detractor of wealth and company debt is one and the same. Let’s say the company you’ve invested is making money from their new product launch. The money this company is making should be going into investors pockets as well. However, if a company has debt, it has to pay off its debtors before paying you as an investor. That dividend investors seek or increase in stock price will never happen if the money earned keeps going towards paying off company debt.
CASH FLOW
Cash flow is synonymous with debt. If a company has positive cash flow then odds are the company has little to no debt. This creates smooth day-to-day operations for the company and enables the company to reinvest capital back in to the business or buy goods without having to pay interest on money borrowed.
REVENUE GROWTH
Growth is what obsesses Wall Street pundits with companies. They want to invest in companies that are making more money because they know this makes them more money. Therefore, the last thing you want to do is invest in a stagnant or dying company. How do you tell if a company is growing and not dying? When you’re doing your stock research you just look at revenue growth. Revenue will grow with the increase in sales of product or an increase in services provided. This revenue growth is indicative of a growing company and leads to the most important attribute of a company.
EARNINGS GROWTH
Making money on the top line, revenue or income, won’t be enough to satisfy investors. That increase of revenue has to correlate to earnings growth, or bottom line growth. Making sure the company you want to invest in is increasing earnings is the utmost important thing to look for when conducting stock research. In fact, companies have to report their quarterly earnings and this often creates big buying or selling by institutional investors. If a company has positive and earnings growth, institutional investor will usually buy the stock and the stock will head higher in price. If the company fails to grow earnings and misses expectations, the company could sell off drastically. Think of it this way: making more money at your job equates to you having more money, a nicer car and a bigger house. When companies make more money they might buy a nicer office building too. Moreover, they distribute this extra wealth from earnings to investors of the company.
Make sure you are holding a winner and not a loser in your stock portfolio. Conduct in-depth stock research prior to investing in a company and look for positive attributes such as profit margins, return on equity, return on assets, revenue growth and earnings growth. For easy fundamental analysis of stocks go to finance.yahoo. Search for the company you are trying to research in the top left search bar. When the stock quote comes up, go to Key Statistics under the heading, Company, for quick and easy stock research.
Stock research is your test drive for investing in a stock. Do not skimp out when it comes to your hard-earned money. Make sure the company is worthy after diligently dissecting it. There are thousands of publicly traded companies, so if one does not meet your criteria, move on to the next one. Soon enough you’ll find that “sports car” worth owning.
