7 Key indicators used by investors to pick great stocks that All Beginners Should Know

The stock market is a difficult road to cross and even harder if you don’t have the proper vehicle. Just like a surgeon has his scalpels and scissors, an investor has indicators and financial statements to be successful at his craft.

Researching a stock is like shopping for a house. You might find one that looks great on the outside, but you still need to evaluate the inside, your neighbors, the surroundings, and resale opportunity.

That’s why every investor uses a set of indicators, questions, performance ratios, and financial statements to help them cut through the fog in order to get the right information from their analysis.

In this post, I will be sharing 7 key indicators to help you tell if a stock is worth buying.

What is a stock?

A stock is a piece of the company commonly known as a share. That share owes its value to the company assets, demand, and industry growth prospects.

That piece of the company is offered to the public as a way to raise capital for projects, and who owns shares become a stakeholder or shareholder giving them the opportunity to profit from the rise of the share price as the company grows its assets like capital, clientele, demand for its products or services.

What is an indicator?

Indicators are specific and measurable characteristics that can be used to showcase changes or progress making toward achieving a specific outcome. The following are also known as performance ratios. These ratios are able to showcase the overall health of a company to then compare it to its competitors and overall industry and market.

This is a good place to measure the ability of a business to generate a profit, growth potential as well as to forecast financial or economic trends.

Earnings per share (EPS)

This is the amount you will get by each share if the company paid out all of its profits.

Formula: Net income divided by its outstanding share.

Using the quarterly net income will get you a Quarterly EPS, using the Annual net income will get you Annually EPS.

E.g. — Apple has 57.41M shares outstanding / 2020 Revenue 16.69B

2020 EPS = 57.41 / 16.69 = 3.43 EPS

EPS can tell you how companies in the same industry compare. A consistent increase in EPS year after year is often a good indicator.

Price to earnings ratio (P/E)

Formula: Share price divided by Earnings per share (EPS)

E.g. — Apple stocks currently sell for $148 and its earning per share is $4.45. P/E = 148 / 4.45 = 33.25

P/E ratio = 33. Meaning we have to pay 33x the apple annual earning to get 1 share.

A high P/E ratio will often be viewed as an overpriced stock.

Price to book ratio (P/B)

The book value is the difference between the total assets minus liabilities on a per-share basis.

The price to book ratio compares the price of the stock between the current equity listed in the annual report.

Formula: Price per share divided by the book value per share.

E.g. — Apple stock currently sell for $148., and book value is $4.15

P/B = 148 / 4.15 = 35.66

The P/E ratio is used to compare a company’s market price to its Book Value per Share.

Return on equity (ROE)

The ROE tells you the value you would receive as a shareholder if the company liquidate tomorrow.

Return on equity is a key guide for investors to measure the growth in profit for a company.

Formula: Calculated by dividing the net income by the shareholders’ equity, then multiplying by 100.

E.g. — Apple had a net income of $57.41B in its third quarter of 2020. And the Shareholder’s equity back then was $65.34B.

ROE = 57.41 / 65.34 * 100 = 87.86 % Return on Equity

Some investors like to see ROE rising by 10 percent or more per year, which reflects the performance of the S&P 500.

Dividend payout ratio (DPR)

The DPR gives you an idea of how well a company’s earnings support the dividend payments. It measures what the company pays out to investors in dividends compared to what the stock is earning.

Formula: DPR is calculated by dividing the annual dividends per share by the EPS.

E.g. — Apple EPS equals $4.45, and the annual dividend is $0.88, the DRP is 19%

DPR = 0.88 / 4.45 * 100 = 19%

If the DPR is high there is a risk that the company might not be able to sustain these payouts or have less cash to invest in bigger projects.

Dividend Yield

Dividends = Reward that stakeholders get for owning a company.

The Dividend Yield measures the return on a dividend as a percentage of the stock price.

Formula: It’s calculated by dividing the annual dividend per share by the price per share.

E.g. — Apple pays 0.22 cents 4 times a year, which adds to a total of 0.88 cents annual dividends.

Dividend Yield = 0.88 / 148 * 100 = 0.59%

The dividend yield can tell you how much cash flow you’re getting for your investments.

Debt-to-equity ratio (D/E)

The debt-to-equity ratio is used to evaluate a company’s financial leverage.

Formula: Calculated by dividing total liabilities and total shareholder equity.

E.g. -- Apple 1st Quarter Long term debt $245.06B, and Shareholder’s Equity $72.28B

D/E = 245.06 / 72.28 = 3.39

Gives investors an idea of how much the company is relying on debt to fund its operation.

A high debt-to-equity ratio indicates a company that borrows a lot. Whether it’s too high depends on a comparison with other companies in the industry. For example, companies in the tech industry tend to have a D/E ratio of around 2, whereas companies in the financial sector may have D/E ratios of 10.

By now you are probably having a headache, just like me. It is quite difficult to remember all these indicators. It is good to know how the equations of the performance ratios work and why we use them. But by no means do you need to remember each of them. You can find all the performance ratios already calculated for you in any of the web pages linked in this post.

https://finance.yahoo.com/

https://www.nasdaq.com/

https://www.marketwatch.com/

https://www.investopedia.com/

https://www.wsj.com/

Conclusion

Indicators can help you assess the value of a stock and its growth potential. But there are many other factors affecting stock prices that can’t be easily measured. Some of them are

• company news and performance
• industry performance
• investor sentiment
• economic factors

That’s why you should always combine as much as proven indicators, as well as asking yourself key questions about the company and sector you are getting ready to invest in.

Disclaimer: This is not financial advice, I am just a guy with a laptop sharing his opinions and experience. This is for entertainment purposes only. Always Do your own research before investing.