Before you purchase stocks, you should conduct enough research to identify the best stocks to invest in. Your decision should be based on the information that you have gathered. Also, keep track of the stock analyst ratings and news to help guide you further.
Below are the things that you should do before you acquire any stocks:
1. Your Focus Should Be Narrowed
Financial reports usually contain details about the following:
Revenue: it is the amount of capital that a firm usually makes during a specified period. In the income statement, the first thing that you notice is the revenue. The revenue is subdivided into “nonoperating” and “operating” revenue. The operating revenue talks about the amount of money the company has generated. Nonoperating revenue, on the other hand, focuses on activities such as selling assets.
Net income: this is the amount of money made after taxes, operating expenses, and depreciation. The amount is deducted from the revenue.
Earnings: when earnings are divided against the available shares that can be traded, you get EPS (earnings per share). The number you get showcases the firm’s profitability, and you can easily carry out a comparison between different companies.
ROA (return on assets) and ROE (return on equity): ROE usually reveals the number of profits that a firm can generate using the money invested by the shareholders. ROA helps to identify the profit percentage the firm will generate with the assets it possesses. Each figure will be derived from the firm’s annual net income. The percentages will ensure you are conversant with whether the firm is operating efficiently.
When a company purchases back its shares, it will artificially boost the return on equity while reducing the shareholder equity denominator. You should be aware of such issues.
2. Turning to Qualitative Research
Qualitative research ensures you have learned about a company’s prospects and operations. As you purchase stocks, you are ensuring that you have a personal stake in a business.
Quantitative research ensures that you have learned about the financials of the firm. Qualitative research ensures that you have gotten further details about the corporation. Some of the questions that you should consider include inquiring about how the firm makes money, among other important details.
Look into whether the firm has a competitive advantage. In this case, ensure that the company is offering something hard to imitate. It could be the business model, brand, research capabilities, ability to be innovative, operational excellence, or patent ownership. If the competitors find it hard to copy the business model, they have a strong competitive advantage.
Is the management team capable enough? The leadership team plays a key role in the direction the firm will take. You can learn more about the management team by engaging them through conference calls. The annual reports also come in handy. Conduct some research about the board of directors since they are responsible for representing the shareholders in the boardroom. Keep away from a board made up of insiders. A good board should comprise of independent thinkers who will assess the actions of the management team well.
Is there anything that could go wrong? In this case, the main focus is not on developments that will affect the stock prices but the changes that will affect the firm’s ability to grow for many years to come.
Look for the red flags. Are there any “what if” scenarios? For instance, what happens when the CEO retires? Is there a worthy successor who will steer the company forward? When a competitor emerges, how will the company maintain its competitive edge?
3. Utilize Your Research Well
There are different factors that investors consider as they try to gauge the financial health of a company while evaluating the value of the stocks. The income and revenue matter a lot, as well as the capabilities of the management team.
As an investor, you should have a well-informed narrative regarding the firm and the factors that make it a suitable investment in the long run—the context matters in this case.
You should combine your research with the historical data to learn more about the firm’s resilience when different challenges occur. Look into how the corporation will react when and how it has been improving its performance with time while also delivering value to the shareholders.
Ensure that you have enough research tools, which include stock screeners. Also, compare the key ratios and the numbers to other firms in the same sector.