Through this article, I am not providing any analysis methods or ratio calculation formula to valuate a company or stock. This is the very basic ideas but, most important for an investor to start valuation on a company to decide whether the stock is good to invest or not. The intention behind this article is the huge queries receiving from newbie and experienced investors asking the valuation factors and step by step guidance. Please read further below:
Before proceeding with any action, one should understand what he doing and what is the goal. The same theory applicable to here also, when you valuating a stock. Investor should have enough knowledge about required factors to valuate and identify the suitability of an investment. Some fundamental information provided here to help long term investors requirements and update knowledge.
1. Products and services – Investors should have knowledge about the product and services offering by the company. This is helpful to understand the product or service popularity in the market. Best example is Coca Cola. When Warren Buffet bought the stocks, he was well aware the public interest and future profit generation capabilities of this product. This calculation supported him to move further to select this stock to his portfolio and generate enormous returns from it in the coming years.
2. Company management – Identification of the company management performance is very important for an investor. This is the most important measurement for an investor to identify the future growth of the company in all means. A good management can only lead a company to success with innovative ideas and proper action in proper time. The team work from well performing and capable management is the fact behind most successful companies in the world.
3. Identify the competitors – Identifying the similar product and services from competitor companies is helpful for an investor to measure the product and service quality of his targeted company. If public is more interested to the product or services offering by the targeted company, is a positive signal. Huge and increasing customer base is always a positive point.
4. Sales report – Year to year increasing sales volume and profit is a good symbol. Consideration on the increase and decrease of production cost also should come under your valuation. Increasing sales and production costs are not giving any changes. Increasing net sales volume and decreasing production cost is a positive symbol. Investor can receive this information from the annual reports listed in company website or from stock exchange web site. A comparison of at least 5 years will be good idea.
5. Net profit and debt – Check out the net profit and the debt part. Net profit should be increased year to year and the debt should down.
6. Earnings per share (EPS) – Find out the status of EPS growth from past 5 years. Increasing EPS in each year is a good symbol. It shows the profit generation capability of a company.
7. Dividend history– Consider the dividend part to identify whether the company is a good dividend payer or not. As per legend investor Benjamin Graham, one should consider the companies if it has a consisting dividend payout history of last 20 years. You could consider a company if it has the dividend payout history of at least 10 years.
Above mentioned details are good to valuate a company and management performance as well as the capacity of generating profit. All the above mentioned factors are strongly supporting by legend investors as valuation factors. With fundamental research, lots of mathematical calculators and ratio analysis methods available to identify the status of these factors. Profit generating capacity, management stability, dividend yield are some of them. As a new investor you could be aware on the above factors before making decisions to invest on a stock.
Please critique and comment freely! If there is a step I missed or that you think needs to be tacked on to the end, please let me know and I’ll add it.