When the stock price of a company rises, subsequently its revenue soars. However, based solely on these factors, an investor cannot be certain that it is a worthwhile stock to invest in. You need to dive into the growth rates of the company, its challenges and valuations to determine whether the stock is worth buying.
Characteristics of a worthwhile stock
Stock exchanges are riddled with too many listings, and it may be hard for a new investor to identify a worthwhile stock. However, the following characteristics that define a good stock will help you recognise one that’s worth investing in:
- A good stock comes from a company achieving consistently increasing profits. The fundamental indicators of the company will give you this information.
- A good stock comes from a company with low debt. A company with low liabilities will provide higher returns.
- A worthwhile stock comes from a company with a good product. If you observe the stock performance of companies with a popular product, you will realise that innovative product stocks display phenomenal performances.
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Invest in a stock only if the parent company’s cash flow report is in good health.
Steps to determine whether a stock is a good buy
Check the health of the company’s cash flow report
Invest in a stock only if the parent company’s cash flow report is in good health. By ‘good health’ we mean that the company operations must churn enough cash to cover the expenses for the cost of doing business. Extract the company’s cash flow report. If it is positive, then it’s a green signal for the investor.
Evaluate company’s profits
The profits should be solid for the company whose stock you are planning to purchase. Analyse profit growth of the company for the past 5 years in their profit and loss accounts. A worthwhile stock comes from a company that exhibits consistent growth.
Evaluate the quality of sales
Evaluate the company’s sales quality by analysing the sales turnover for the last 5 years. Has the turnover increased or depreciated? You will be able to find the answer in their profit and loss accounts. The sales revenue must have grown consistently in the last 5 years.
Check the company’s profitability
A worthwhile stock comes from a company with high profitability. Evaluate their financial ratios and choose stocks backed by high profitability figures.
Choose stocks from a company with ROA (return on asset) greater than 10% p.a. (per annum)
Calculate the ROA for the company by dividing the company’s total profit by its total assets. The ROA reflects the company’s stocks’ abilities to generate profits.
Identify good value stocks
The most worthwhile stocks gain steady growth. They are strong, and are backed by robust valuations. You can identify these value stocks by diving into the financials of the company that’s issuing the stock. The best stock buys are backed by strong and sustainable financial statements and are not overvalued.
