Factors to Consider When Buying Stocks
Finding the right price to pay for a stock or the best price to sell a stock is the way investors and new investors make money in the stock market. But it is like many things in life, it is not easy to do. There are some indicators used by financial analysts when buying stocks. Let us have a look at them.
Earnings
you have to look for companies that makes goof profit. Make sure the target company is reporting earnings substantially higher than its sector. Also, you should compare it to major competitors in the market.
Free Cash Flow
Strong companies generate a lot of cash and, particularly, have a large flow of free cash. Free cash is what is left over after the company reinvests in itself to keep the business operating. Another way to think of this is how much cash you could pull out of the business without forcing a change in operations.
Return on Assets (ROA)
Return on Assets (ROA) is one of the important factors we should consider while buying stocks. It tells investors the company is using assets wisely and creating value for the owners. it tells how efficient is the company in generating earnings. Strong companies have a superior return on assets to their sector. For example, two companies each have 100000 in assets. One company uses those assets to create 500 in earnings, while the other company uses the same amount of assets to create 100 in earnings. you should choose the first one. Compare companies in the same sector for a valid check.
Return on Equity (ROE)
Another way to look at a company’s profit-generating efficiency figures in how the company uses debt in addition to assets. Since most companies use some debt to run the business, it is important to consider it. Return on equity considers how well the company uses investors’ capital and includes the debt. It is very important to compare companies in the same sector.
Net Margins
A company’s net margin is simply net income divided by sales. What this tells you is how efficient the company is in wringing profits out of sales. Some industries (grocery stores, for example) have low net margins and must drive a lot of revenue to generate profits. Other industrial sectors have higher net margins thanks to the nature of the business (software sector). Great companies beat sector averages and close competitors. investors should analyse Net Margine when buying stocks.
