Indicators of a Great Stock

For investors, finding a stock to buy can be some of the most fun and rewarding activities. It can also be quite attractive, provided he or she ends up buying a stock that increases in price. Below are five tips to help you identify stocks that have a good chance at making you money.

Profits

The very essence of a successful company is its ability to make a profit. In fact, profit is the single most important financial element of a company. Without profit, a company goes out of business. If a business closes its doors, private jobs vanish. In turn, taxes don’t get paid. This means that the government can’t function and pay its workers and those who are dependent on public assistance.

Profit is what is left after expenses are deducted from sales. When a company manages its expenses well, profits will grow.

Sales

Looking at the total sales of a company.

A company (or analysts) can play games with many numbers on an income statement; there are a dozen different ways to look at earnings. Earnings are the heart and soul of a company, but the total sales (or gross sales or gross revenue) number for a company is harder to fudge.

It’s easy for an investor — especially a novice investor — to look at sales for a company for a particular year and see whether it’s doing better or worse than in the prior year. Reviewing three years of sales gives you a good overall gauge of the company’s success.

Liability

All things being equal, most investors would rather have a company with relatively low debt than one with high debt. Too much debt will kill an otherwise good company.

Because a company with low debt has borrowing power, it can take advantage of opportunities such as taking over a rival or acquiring a company that offers an added technology to help propel current or future profit growth.

Notice that you aren’t talking about a company with no debt. A company with no debt or little in the way of liabilities is a solid company. But in an environment where you can borrow at historically low rates, it pays to take on some debt and use it efficiently.

Secondly, notice that liabilities are an issue. It isn’t always conventional debt that may sink a company. What if that company is simply spending more money than it’s bringing in? Liabilities or “total liabilities” takes into account everything that a company is obligated to pay, whether it’s a long-term bond (long-term debt), paying workers, or the water bill. Current expenses should be more than covered by current income, but you don’t want to accumulate long-term debt, which means a drain on future income.

Also, in some industries, the liabilities can take a form that isn’t typically conventional debt or monthly expenses.

To discover some good parameters of acceptable debt, look at the company’s financial ratios on debt to assets.

Bargain price

You can look at the value of a company in several ways, but the first thing you should look at is the price-to-earnings ratio (P/E ratio). It attempts to connect the price of the company’s stock to the company’s net profits quoted on a per share basis. For example, if a company has a price of Rs15 per share and the earnings are Rs1 per share, then the P/E ratio is 15.

Generally speaking, a P/E ratio of 15 or less is a good value, especially if the other numbers work out positively. When the economy is in the dumps and stock prices are down, P/E ratios of 10 or lower are even better. Conversely, if the economy is booming, then higher P/E ratios are acceptable.

A stock may also be a bargain if its market value is at or below its book value (the actual accounting value of net assets for the company).

Dividends

 A consistently rising dividend is a positive sign for the stock price. The investing public sees that a growing dividend is a powerful and tangible sign of the company’s current and future financial health.

A company may be able to fudge earnings and other soft or malleable figures, but when a dividend is paid, that’s hard proof that the company is succeeding with its net profit. Given that, just review the long-term stock chart (say five years or longer) of a consistent dividend-paying company, and 99 times out of 100, that stock price is zigzagging upward in a similar pattern.

High barrier of entry

A high barrier to entry simply means that companies that compete with you will have a tough time overcoming your advantage. This gives you the power to grow and leave your competition in the dust.

Low political profile

History shows that companies that are politically targeted either directly or by association (by being in an unpopular industry) can suffer. There was a time that holding tobacco companies in your portfolio was the equivalent of garlic to a vampire.
All things being equal, you may want to hold a stock in a popular industry or a nondescript industry rather than one that attracts undue (negative) attention.

Favorable megatrends

A megatrend is a trend that affects an unusually large segment of the marketplace and may have added benefits and/or pitfalls for buyers and sellers of a given set of products and services. A good example of a megatrend is “the milenials of India”; India is ranked no1 in youth population i.e people in the age group of 20-30. Those companies that provide services and products for youth would have greater opportunities to sell more of what they provide and would then be a good consideration for investors.