There are several factors to consider when choosing which stock to buy. Some of these include the price, earnings per share (EPS), how much money they’re making in total revenue, and the growth rate. One must do their research on companies. Otherwise, there’s a chance you could be buying into a company that won’t last long.
The article will summarise some of the most prominent factors for choosing a stock to invest in.
Factors to consider
The main factor that you should consider is earnings per share (EPS). The higher this number is, the more likely it’ll increase in value over time. You can find EPS by looking at financial statements from companies, such as quarterly reports or 10-K filings. The profit margin and the debt-to-equity ratio are other things to look for in financial statements. Profitability and having a low amount of debt can lead to an increase in EPS, which makes the stock more likely to increase in value over time.
Knowing the revenue
It would be unwise to buy stocks without knowing how much revenue is made. You can usually find this number under ‘total revenue’ on the income statement. Dividing this number by the number of outstanding shares will give you a revenue per share (RPS), which should be compared with EPS for each company when choosing a stock. The higher RPS is, the better because that means that they’re making more money per share.
Another factor that goes hand in hand with earnings is debt. Companies that have a lot of debt will be burdened by payments, which may cause the price to drop if they’re unable to make them. It’s important not to buy stocks from companies with a lot of debt because there is less money going into the company and more going out, making it more difficult for them to increase value over time.
Check the balance sheet
Every investor should check the balance sheet before buying stock to see how much cash they’re sitting on compared with total liabilities. Since interest rates are at record lows, a high debt-to-equity ratio isn’t as bad as it used to be because revenue from investments costs very little nowadays. This number can shed some light on whether or not a company has enough money to stay afloat.
Every stock has a growth rate, and it’s essential to look at the average annual growth rate (AAGR) before buying any stocks. AAGR can be found by looking at revenue and EPS over several years and finding the percentage change. If the company increases, it may be worth investing in because it will gain market share from competitors who aren’t growing as fast.
Look for red flags
It’s also imperative to check whether or not there are any warning signs such as high debt or declining revenue before investing in a company. Also, if one company already has a monopoly on an industry, it is hard for new companies to get started. There is less competition, leading to higher prices for consumers whenever this happens.
Every investor should check a company’s financial statements before buying its stock. It’s also important to look at their growth rate and how much cash they have on hand compared with total liabilities. Another thing to do is research any warning signs such as high debt or declining revenue.
Find the monopolies
Finally, it’s always helpful to find companies that are already monopolies in their particular industry because that ultimately leads to higher prices for consumers whenever one company has a monopoly on an entire industry.
In summary, here are all the different factors an investor must consider when choosing which stocks to buy, including EPS, RPS, cash versus debt, AAGR, market share, warning signs of large debts or declining revenue, and whether a company has a monopoly on their industry.
If you follow this guide and look into each of these factors before buying, you will find the stock that best suits your needs.