Learn to Invest
Together with J&M Investments, an investment firm based in Mexico City, we created a how-to guide for stock analysis. In this guide, investors will go through both the qualitative and quantitative analysis.The quantitative analysis includes calculating financial ratios like the debt-to-equity ratio and diving into the three different financial statements (balance sheet, income statement and cash flow statement). The qualitative analysis includes product and industry research, management analysis, corporate governance and analyst coverage.
This guide is attached as a PDF file available for download. If you have any questions or suggestions please feel free to contact us. If you want to write your own post, you are more than welcome to do so under the “Participate” section.
How to Analyze a Stock
1. An overview:
After choosing a company, you want to make sure why the company is worth your investment. Peter Lynch always mentions how the majority of people put in more effort in researching what microwave is the best in the industry than what stock is the best investment. People talk about stocks as if they know a secret (whisper stocks) nobody else knows, when actually they are information they heard from someone else with no real evidence to back it up.
As an investor, you want to be sure why you own a stock. You need to be able to explain to a ten year old in less than two minutes why they should buy that stock. When knowing your stocks, a big sell off won’t scare you. On the contrary, a big dip will motivate you into buying even more because you know how much it’s actually worth.
Look at the important ratios and what they are telling you. Ratios can tell you a lot about a company without the deep analysis.
1. P/E Ratio: A P/E ratio shows how many times an investor is paying for the company’s earnings. If a company has a 30 P/E ratio, the investor is paying a price of 30x what the company is earning. The lower the better. This ratio should be compared with other competitors in the industry.
2. EPS: How much money a company is making for each share outstanding. This tells investors wether a company is providing good earnings per share compared to other players in the industry. This ratio should be compared with other competitors in the industry.
3. Gross Margin: Gross margin shows how much capital a company retains for every dollar of sales. If a there’s a 50% gross margin, the company keeps .$50 per dollar of sales. This ratio should be compared with other competitors in the industry.
4. OPC Margin: Operating Cash Flow margin shows how efficient is a company at converting it’s sales into cash. This ratio should be compared with other competitors in the industry.
5. Debt to Assets: This ratios shows wether the company’s assets > liabilities. A ratio > 1 is a good sign. If a company has too much debt, the investor needs to know why and asses the risks.
6. Price to Book: A stock’s book value is the result of the shareholders equity / total amount of shares outstanding. The price to book ratios tells us how many times the stock is trading above its book value. If a stock is below its book value the it’s undervalued and as an investor you should know why it’s undervalued and if it’s value should increase.
Now it’s time for the nitty gritty part of analyzing a company. The financials. Our guide will show you step by step what to look for and how to analyze the three different financial statements: Balance Sheet, Income Statement & Statement of Cash Flows.
Please feel free to download our guide down below.
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