5 Important Things to Look for In a Stock Company Profile
Stock market investment isn’t like throwing away your money in a poker pot and just hoping that you will somehow hit a jackpot. To be a successful stock market investor, you need to thoroughly study the market and make informed investment decisions.
Investors need to examine all aspects of the market to determine profitability of a particular stock. Here are 5 key terms relating to a stock company profile that investors should inspect carefully before making any investment decision.
1. Historical Revenues
The past period revenues are the single most important element of a stock company that tells a lot about its future profitability. Also known as ‘top line’, the revenue is listed on the first line of the income statement of a company.
You should find out whether the revenues are trending upwards or downwards in the past five years. While they are not a realistic predictor of the company’s long term profitability, they can give you an idea where the company is headed in the short term.
2. Profit Margin
The profit margin is another important element that tells about the state of the company. It is simply the percentage of revenues after the payment of expenses and taxes. You should look for a company with a growing profit margin every year. An ideal company is one whose profit margin remains in the green even during a recession. Companies with high profit margin command a healthy growth in their stock prices making them attractive for the investors.
3. Debt-to-Equity Ratio
The debt-to-equity ratio is another important aspect of the company profile or business description. You should look for a ratio of 1:1 or lower. Higher ratio indicates that the company is highly indebted. The lower the ratio, the less risky is the company for the investors.
4. Net Income
Net income is yet another important element that you should not overlook when conducting a cost-benefit analysis. Listed in the income statement, it is known as the bottom line figure as it is mentioned at the bottom of the page.
A company with growing net income will be able to pay dividends to the stock holders. Also, it is expected that the company’s stock prices will tend to rise making them an attractive option for the investors.
5. Price-to-Earnings Ratio (P/E Ratio)
The importance of looking at price-to-earnings ratio cannot be emphasized enough. The ratio tells whether the stock is overvalued or undervalued. A stock is overvalued when its price are much more than the earnings. On the other hand, a stock is said to be undervalued when the prices are lower than the earnings.
A company with a P/E ratio that is lower than the market ration (generally between 14 and 17) is as an attractive investment option. Apart from that, you should compare the ratio with peers in the industry. A low ratio indicates that the stock of the company is trading at a bargain. Warren Buffet uses this value driven approach that has been widely successful in appraising the future profit position.
On a final note, you should keep in mind
that there is no guarantee when it comes to investing in the stock market. No
investor can be 100 percent sure of making a profit even after a thorough study
of the company profile. That being said, a study of the market trends using the
fundamentals mentioned in this article will certainly increase your chances of
earning a positive return on investment.