The stock market has been a roller coaster ride lately. However, if you plan to invest for the long-term, it would be vital to know your stock fundamentals. They’re not as hard as they sound.
When picking a stock for long-term growth potential, look first at what goods or services the company produces. Whereas food and oil seem to always be in demand, horse buggy whips may not have much of a future. Also, compare how a company is doing compared to others within its industry.
Another thing to check out is who runs the company. What track record do the CEO, the chief financial officer, and the president have? A corporation may fare much better after booting out an incompetent CEO and hiring a new one, someone with a good past.
Next, look at the company’s financial position. Are earnings going up every year? Avoid companies with losses if you are a conservative investor. Over the long run, stock prices tend to follow earnings.
The P/E ratio is the company’s price divided by its annual earnings. If a corporation is selling at $50 a share and its earnings are $5 per share, calculate its P/E by dividing $50 by $5, which is 10. Then compare it to the average P/E of companies within its industry. High P/E ratios can mean a company’s stock is either overpriced or investors are bidding up the stock price because they think the company has potential.
The book value is what a company is worth. Divide a corporation’s assets, minus its liabilities, by the number of outstanding shares. If the result is higher than its current price, the company is selling cheap. Historically, prices catch up with book value.
A company’s debt is a good indicator of health. If debt is high compared to stockholder’s equity, beware. Conservative investors should choose companies with low debt. Leave the high debt companies to high rollers.
The return on equity (REO) measures the rate of return on investors’ capital. To calculate, divide a company’s earnings per share by its book value. If a company earns $5 and its book value is $10, divide 5 by 10. The result is 50%. The higher the ROE, the better.
The dividend is paid to investors four times a year as a reward for owning shares of the company. Conservative investors look for dividends that increase every year.
When facing a volatile stock market, choosing a good conservative company for long-term growth can be frightening. Knowing the fundamentals about a stock can make the choice less scary and more profitable.
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