Of late I have been delving into the details that an investor should look into when selecting securities to put his money in. I did a post about the financial documents that an investor has to read to make an informed decision, I did a post on the types how an investor analyses a stock, and yet another on how an investor analyses a bond. There was also another important concept to consider called margin of safety.
In line with the most recent of investing posts, I am going to do one on other things that a value investor has to consider when making investment decisions.
General stability of the company– in value investment circles, this is measured by the maximum decline in per share earnings (how much each share earns) in any of the past say 7 years, or any figure that you please as against the average of the three preceding years i.e. you have the per share earnings of a company going back 7 years from now. Take the average of the earnings of the preceding 3years and use it to measure how far the earnings have decreased or increased in each of the last 7 years. Increase or no or little decline is favorable.
General growth of the enterprise. This should not be explosive over a really short time because a company whose growth and earnings increase in biblical proportions, like growth stock have the tendency of falling away in the same fashion(am thinking the tech bubble in the nineties). It is better to invest in companies that have satisfactory growth record over a given time say 7 years and have shown fairly good performance in bad times(this are mostly blue chip stocks)
Profitability– a lot of profit is always an attraction to investors since they are mostly followed with high annual growth rates in earnings per share. This is more often than not a show of the general strength or weakness of the company. The company has strong fundamentals if the profitability goes on for a fairly long time.
Good financial standing– This will be brought out in the analysis of the company’s financials. A good consistent financial standing is always a requirement in an investment stock. An investor’s criteria for this financial standing can be a ratio of 3 to 1 for current assets to current liabilities, meaning that the liabilities of the company are covered three times by the current assets
The stock price variation over the given period– an investor is inclined to stocks that have had a favorable increase in price over a given period over those whose prices have remained stagnant or have fallen for no good reason
Dividends– If the company gives them, an indicator of the favorableness of the company is whether these have been awarded to the investors consistently in the past without fail. The company should be particularly favorable if this dividends were also continued in a very bad economy like in the past recession. Companies that continued their dividend payments while others were failing should be given some consideration.
The industry that the company is in– there are some industries that are more are more poised for more profit than others and while this is something that the investor has to consider, he must mot spend too much of his time looking for the next big thing since there is no way of really predicting what will happen in the future and so he should concentrate on things that are quantifiable.
So those are the major factors that you should consider before you invest in any stock.