One of the most important skills that investors can learn is how to evaluate Stocks The evaluation of stocks requires answering vital questions about the company, and its history. If you have concrete answers to these questions, then you have analyzed your stock well.
Questions For Stocks
- What is attractive about this particular stock?
- What industry is this company in? Is it an industry leader?
- What products or services does this company sell? Have you used any of them? Are they good?
- Who are the competitors in this industry, and what makes them different?
- Who is the CEO of this company? What is his track record? How does the top management in this company behave?
- Is this company consistent? How has its growth over the past few years been?
- How does the future look for this company?
These are just a few of the questions needed to get you started! Once you have answered these questions, you would have determined if the company is worth investing in. If yes, you need to do a deeper dive. Corporate, and Industry analysis are our next steps.
Corporate Level Analysis
- Financial Results:
- Debt: The debt of a company is an important factor to consider when investing. If a company does not manage its debt, it might be dissolved, and your money disappears as well. However, large amounts of debt aren’t that scary. The important thing to look for is how the company service its debt. If the company has been repaying its debt regularly, then it is likely it will do so in the future
- Earnings: Look at the company’s earnings history. Have they been consistent? Are their earnings increasing or decreasing? Another thing you can look for is the company’s dividend-paying history. Dividends usually signify profits. Important ratios to look for are the debt to equity ratio and the price to earnings ratio (PE). Assets: Look for the assets and liabilities the company has. How valuable are those assets in the business? How bad are those liabilities?
- Management Quality:
- Experience: How much experience does the company, and upper management have? If these employees are experienced, it will reflect in how they treat the customers and their business output.
- Customer-care: How well does the company take care of its customers. Do they accept feedback from customers? How concerned are they for their shareholders? These are questions that you must have answers to
- Decision making: At times, every good company has dark days. It is up to the management to pull them through. How does the management make decisions when the company is doing well? What about when the company is doing poorly? Looking at these questions, you will understand the calibre of the management
- News: Advertising is how companies make themselves known. It is important to maintain a good reputation. Otherwise, customers will not trust the company, and sales drop. Make sure that the company has no negative news about it. If it does and has rectified its mistake, that is a good sign. Else, it doesn’t make sense to invest in such a company.
- Interests of shareholders: Does the company care about its shareholders? Do they offer dividends, or take the shareholder votes seriously? Does the company involve itself in fraud or other malpractice?
- Growth: As companies become more and more successful, there is little room left to grow. You have to identify how likely it is to grow in the future. One way of doing this is by looking at the graphs, and trends of this company. How did it grow in the past? Based on this, you can project its future growth. Look for strong management and strong customer relationships.
Industry Level Analysis
- Sustainability: Industries such as coal, natural gas, and oil have a huge impact on businesses all over the world. In 50 years, or even 100, these industries might not be as prominent as they are today. When investing in a company, you need to look out for these factors. How sustainable is the industry? Is it just a fad that may fade out, or a solid company? Another thing to consider is the growth of the industry as a whole. Is it declining, or booming?
- Peer to peer comparison: When you choose a company to invest in, you need to look at their competitors. Compare the P/E, their debts, their stock prices, earnings, etc. This is crucial to your analysis. You cannot be betting on the losing horse. Just like that, you need to make sure that this company is the best in the industry, or is going to become the best in their industry.
- State of the market: You have to also look at where the market is now. If the prices of all these stocks are at all-time highs, they are likely going to decrease. Timing is an important factor when investing. You should also consider what the company is doing during this time. When their stock price is doing well, how are they going to capitalize on that? What about when it drops? How are they going to cope up?
Where can you find this?
Doing simple searches on the internet can get you most of this information. You can visit the company website as well. Important information is available on the SEBI website, NSE website, and BSE website. If you are looking for debts, or bankruptcy notices, look on the Insolvency and Bankruptcy Board Of India.
