Hey All,
It’s been a while since I last posted, as I’ve been occupied with office responsibilities and household chores. I also attended a family wedding, which kept me away for some time. But now back to business and here I am posting in my favourite community that is TradFi also know as Traditional Finance. In today’s post, we will be looking at seven steps that should help us analyze a stock and decide whether to invest in it or not. But before we begin, take a look at the following image, which illustrates a key idea and numbers that we’ll be discussing.
I think we can all agree that there are many things to consider before investing in a company, and at times, the process can feel daunting. Do you guys agree with me here? The seven key metrics highlighted in the image above are explained at a high level as follows::
1️⃣ P/E Ratio (Price-to-Earnings Ratio) – Is the stock reasonably priced compared to its earnings?
2️⃣ ROIC (Return on Invested Capital) – How efficiently is the company using total invested capital?
3️⃣ D/E Ratio (Debt-to-Equity Ratio) – How much debt is the company carrying relative to equity?
4️⃣ EPS Growth (Earnings Per Share Growth) – Is the company’s profit growing consistently over time?
5️⃣ ROE (Return on Equity) – How effectively is the company generating returns for shareholders?
6️⃣ EBIT Margin (Earnings Before Interest and Taxes Margin) – How strong are the company’s core operating profits?
7️⃣ Gross Margin – How much profit remains after covering the cost of goods sold?
Once these terminologies are understood, it is important to be familiar with the benchmark numbers associated with them. To be honest I always get confused with the numbers and then always refer to google to let me know what is a good number for these different ratio matrix. Lets break down the numbers here into a table first and as to why the number is considered as good.
| Ratio | Great If | Why This Is Considered Good |
|---|---|---|
| P/E Ratio (Price-to-Earnings Ratio) | < 20 | Indicates the stock is reasonably priced relative to its earnings. |
| ROIC (Return on Invested Capital) | > 15% | Shows the company efficiently generates returns from total invested capital. |
| D/E Ratio (Debt-to-Equity Ratio) | < 1 | Suggests the company is not heavily dependent on debt financing. |
| EPS Growth (Earnings Per Share Growth) | > 10% CAGR | Reflects consistent profit growth over time. |
| ROE (Return on Equity) | > 15% | Indicates strong returns generated for shareholders. |
| EBIT Margin | > 10% | Demonstrates solid operating profitability before interest and taxes. |
| Gross Margin | > 40% | Shows strong pricing power and efficient cost management. |
Now speaking of my personal interest then I normally track the ROIC (Return on Invested Capital) numbers. As ROIC tells you how efficiently a company turns all the capital it uses (both debt and equity) into profits. For example:: for every Rs.1000/- invested in the business, how much real operating profit is generated? As a thumb rule a company with 25% ROIC [or a higher number] can compound wealth much faster than one earning in between 8–10%. I hope I was able to explain the 7 different ratio numbers to look at before investing in any stock. Well this should be it for todays post on - "How to Analyze a STOCK in 7 Steps - Lets Explore..." Do you look into other key ratio matrix? Let me know in the comment section below if there is any follow up questions. Happy Wealth Building & Investing... Cheers
#StockMarket #FundamentalAnalysis #ValueInvesting #LongTermInvesting #FinanceEducation
Image Source: Infograph
Best Regards
Paras
PS:- None of the above is a FINANCIAL Advice. Please DYOR; Do your own research. I have a personal interest in blockchain, stocks, and cryptocurrencies and actively invest in emerging projects.
