In Bible, Jesus Christ was teaching his followers using simple parables. By this, he was able to give the very deep meaning of his wordings to his listeners to grasp easily that they were not able to understand if says directly. Parable is a best to convert deep meaning to an easy way to grasp. Here I am using a story of buying a cow to guide you to the necessary areas where you need to focus your attention when analyzing a company or stock to invest.
Suppose you are planning to start a cow firm. You will first build the cattle house, appoint laborers buy considering there past similar experience and will go to buy a good cow.If you saw the cow, what are the qualities you are going to look in? The very first you will try to indentify its age. If it is an old one, you are not going to buy the cow because you know it will not give worth to your money for long run. So you will look for a healthy younger one.Next, you will look into any diseases this cow presently has. If it has any disease, you will try to avid the one immediately.Another question will be its milk producing capacity. You will certainly ask them the amount of milk it was producing in previously and compare this amount to a same breed some of your friends or relatives has. If it is not able to produce the expected amount of milk really the breed required giving, you will rethink to buy this cow.Another thought about the costs for this cow. If you feel that the cost is more compare with the milk the cow producing, you will avoid this cow. Or you will decide to buy. Here you are looking for your profit after all the costs.Also, you will think about how much time you have to wait to get a calf from this cow. Because you know, getting a calf, adding value to your money spending to buy this cow.Finally, you will try to get the cow in a fair price. If the price saying is high, you will try to reduce the same to your expected price level.If everything OK, you will give the green signal and bring the cow to your farm to get profit from that.You should take care identifying and collecting the resource to fulfill the food requirements of your cow. Also you need to tie him gently to not cross the border of your neighbors.Once after the cow reaches to your farm, you will prepare to feed them with good foods, you will search the customers to market the milk. You will gradually workout to make your customer base more and more.You will certainly make a budget in the end of each month to identify your profit compare to the costs, to understand the possible returns.Stock analysis also resemble to the above story. This is how you have to proceed with stock analysis.
1. Company should have strong and efficient management. This is the moral from the experience laborers you are selecting to your farm.
2. You should check the company’s health. If it is a younger one, you have lots of growth opportunities and possible profit chances, depends on below points. This is the moral from checking the cow to confirm it is a young to get more worth to your money and business.
3. You should analyze the company background to confirm company doesn’t have any internals issues or on going problems that can affect investors badly. This is the moral from checking the cow to confirm it doesn’t have diseases.
4. Investors should analyze the earning capacity of the company for last years and its gradual growth in each year. Also he should compare the company with its peers to identify the company is good among them in the sense of earning to an investor. This is the moral from identifying the milk producing capacity of the cow in the previous and present years as well as cross checking the same with similar breed to identify whether it is competing or losing the production.
5. An investor should keep in mind that, if cost of production or services is higher than the profit, avoid such company. It is directly related to debt to equity formula. Debt is more than the capital, company is a bankrupt candidate. Avoid such companies. This is a moral from checking the cost for feeding the cow.
6. The company should be a candidate to issue bonus shares as well as a best dividends time to time. This is the moral from the possibility of getting a calf to increase your business from this kind of bonus.
7. Investors should buy a share in its fair price. That should be a price which justifying the company quality. It is directly related to the P/E formula. This moral taken from the price bargaining you are doing once after decided to buy the cow. You will never buy a cow if its asking price is double. Like that, it is your duty to identify the stock whether it is in the correct price or over price. P/E calculation and peer comparison as well as industry average formulas are best for calculating such.
8. You should take care of the resources company required to go forward with there production without any problems in the future. Huge supplier base, resource availability all are the points to consider. This is the moral from taking care of the resources for your cow to feed her properly or the cow will die soon.
9. You also take care if there are any legal proceedings against the company. This is the moral from tiding your cow gently to not cross the borders of your neighbors to make any lose to them to move legally against you.
10. You should be aware about the customer base of a company. A company with good customer face itself a justification on the quality of there product or service. A day to day increasing customer base is a good sign pointing to the companies future growth. This is the moral from your search for customers to sell milk as well as your increase to increase the base.This story I have narrated here to answer the increasing enquiries about the methods to analyze a company or stock. If you have ordinary common sense, I am sure you will get the idea and you can act as per that. Above mentioned qualities are must requirements for a company to perform well and give rewards to its investors. As an investor, it is your part to identify the company has all these qualities.Feel free to comment and point out if I missed any leading points in this article. Your voice is my energy.