Before you select a stock to buy, it is important that you do a research on the internet.
Below are some of the stock research resources which you can refer:
1. Morning star at
http://www.sg.morningstar.com/
2. Zacks Investment Research at
http://www.zacks.com/
3. Yahoo! Finance at
http://sg.finance.yahoo.com/
4. Standard & Poor's at
http://www.standardandpoors.com/
Also, you can look at their:
Annual Reports - this report will reflect the performance and activities of the firm in the prior year. Every annual report includes a Letter to Shareholders from the chief executive and/or chairman of the corporation. This brief note tends to highlight important accomplishments, challenges, and setbacks of the company in the prior year. In addition, the annual report will often include financial highlights and a review of operations, which should provide more detail on important recent developments, including new product launches, acquisitions, mergers, or sales of units. Also the important element of the annual report is the firm's major financial statements, including its
Balance Sheet
Income Statement
Statement of Cash Flows
Balance Sheet
The balance sheet is a measure of a company's overall health at a particular point in time. It will list all of the company's assets, including its current assets, which are those things that can be converted into cash within about a year, such as inventories, accounts receivable, and cash on hand. The balance sheet will also reflect all of the firm's property, plant, and equipment. Similarly, the balance sheet will detail all of a company's liabilities, including its long-term debt.
By subtracting a firm's liabilities from its assets, you can figure out what's known as its shareholders' equity, a term that simply refers to the
total net worth of the company. The formula is:
Assets - Liabilities = Shareholders' equity (net worth)
or Assets = Shareholders' equity + Liabilities
The sign of a healthy company is one of growing assets, it is also important to see increasing shareholder equity, since that reflects a company's health factoring in its liabilities.
Income Statement
If the balance sheet offers a snapshot of a firm's overall health, an income statement measures something a bit more specific: the profitability of that firm over a given period of time, typically on a quarterly or annual basis.
Sometimes, the income statement also called, Profit and Loss Statement, the P&L, or Statement of Earnings. Regardless of what it's called, a whole host of relevant information about a company's business progress can be found in this financial statement:
- Total sales or revenue - this income statement will show the current quarterly and/or annual sales figures for the firm and compare that with prior periods. Revenue are often the first line item listed in an income statement, which is why we refer to sales growth as top line growth.
- The cost of goods sold - this reflects the total costs it took to manufacture and distribute those goods and services that were sold in that period, including from labor, raw materials, shipping, insurring, and warehousing.
- Indirect costs - these expenses include long-term research and development costs, general administrative expenses, and other costs such as consulting fees.
- Interest income and expenses - companies may invest the cash they have on hand in an effort to maximize the use of their capital. Also firm may incur interest expenses to finance projects.
- Taxes - companies have to manage their tax expenses. The income statement will show a firm's income before and after taxes.
- Net income - it is the most common measure of a company's profitability, since it takes all of the revenues and interest income enjoyed by the firm in a reporting period and subtracts all of the costs required to engineer those sales.
Earnings Per Share
If you divide a firm's net income by the total number of shares it has outstanding, you get its earnings per share, or EPS:
Net income/Total shares outstanding = Earnings per share
Cash flow statement
This statement allows you to know whether the company is a net user or collector of cash?
It add up all the cash that comes into the company through its profits, accounts receivable and its inventories. Then, cash that leaves the company in the form of obligations (like accounts payable), debt financing, and depreciation of plant/property/equipment, are subtracted. What's left - if it's a positive figure - is considered a company's cash and cash equivalents for the end of a particular period. The bigger the number, the better. But, just as important is the growth of this figure over time.
Also important is the profitability of the stock. This can be determined by looking at:
1. Historic Earnings Growth - the most basic measure of profitability is the net income or earnings per share.
2. Future Earnings Growth - you can visit
http://www.zacks.com/ or
http://www.morningstar.com/
3. Return on Equity (ROE) - this is a measure of a company's earnings relative to its shareholder equity.
ROE = net income/shareholder equity
Historically an ROE of 20% or higher was considered the gold standard. But for screening for stocks, you may want to start off by focusing on firms with ROE of 15 or better.
4. Sales measures - Sales are a sign that its products and services are in demand. Smart investor should also look at sales growth becasue this is the company top line growth, other than the bottom line growth (profit) when selecting stocks.
5. Profit margins - it is important to know that the company you invest in has the ability to convert sales into earnings.
Profit margins = net income/sales
Below measures can also be used for
Stock Valuation:
1. Price-to-Earnings Ratio (P/E)
P/E ratio = Price per share/Earnings per share (EPS)
The long-term average P/E ratio for stocks in the S&P 500 has been around 16 times earnings. In general, the lower the P/E, the better. In fact, historically, the broad stock market has performed better in periods of low P/E multiples. Low P/E ratios are like a "Clearance Sale" telling investors that there are good buys to be found. Typically, investors only willing to pay higher P/Es for stocks when alternative investments like bonds are not yielding as much.
2. PEG Ratio (short for P/E divided by Growth)
While value investors pay particularly close attention to P/Es, since they care most about prices, growth investors are often willing to overlook a stock's P/Es ratio if its growth rate is impressive. These growth investors look at PEG ratio to determine which stock to invest on.
PEG ration = P/E ratio / Annual earnings growth rate
The lower the PEG, the more attractive a stock is said to be. Companies with PEG ratios of 1 or less means their earnings growth rates meet or exceed their P/Es are considered very attractive by some investors. Indeed, many growth investors will forgive a high P/E stock so long as it trades a multiple that is close to its long-term growth rate.
3. PEGY ratio
This ratio is a slight variation of the PEG ratio. It add a stock's dividend yield to its growth rate, and then divide that into the stock's P/E multiple.
PEGY ratio = P/E ratio / Annual earnings growth rate + Dividend yield
The lower the PEGY, the better. And the closer to 1 the PEGY is, the better.
15 Questions Phil Fisher asked when he considering buying a business
- Does the company have products or services with sufficient market potential to make possible a sizable increases in sales for at least several years?
- Does the company's management have a determination to continue to develop products or processes that will still further increase total sales potential when growth potentials of current attractive produce lines have largely been exploited?
- How effective are the company's research and development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting methods?
- Are there other aspects of the business somewhat peculiar to the industry involved that will give the investor important clues as to how outstanding the company may be in relation to its competition?
- Does the company have a short-range or a long-range outlook in regards to profits?
- In the foreseeable future, will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing benefit from this anticipated growth?
- Does the company's management talk freely to investors about its affairs when things are going well, but clam up when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
