Seven numbers to keep in mind when choosing stocks

The whole world is within the reach of investors. But how do you pick out the gems from the thousands of stocks? Seven key figures to keep an eye on.

Previously, the options for equity investors were limited. It often went no further than a tassel of ‘oils’, Unilever or some Philips shares. But now you can trade in thousands of stocks, from all over the world, and there is also a wealth of information available about all those companies. That’s great, of course, but the large selection also makes it harder to make the right choice.

Because emotion is a bad advisor, it is better to take a sober look at how the company is financially and how the stock price relates to it. Seven aspects to keep in mind when choosing stocks.

1. Earnings per. shares

A company that sees profits increase obviously has an advantage. A useful measure for this is earnings per. share, which shows how much profit a company gets per. share outstanding.

The higher this number turns out, the better, of course. But also pay attention to the development of results in the longer term. This is because companies can temporarily increase their earnings per capita. share, for example by selling business units or reducing costs. It gives a distorted image.

2. Revenue

In addition to profits, revenue development is also important. Growth companies like Amazon.com and Netflix hardly see their earnings per share increase because they invest the profits to be able to grow further. For example, Netflix may expand its movie offering or take on emerging markets such as the gaming industry.

Conversely, there are also companies that show a constant earnings trend, while revenue continues to decline. Of course, you would rather not have these stocks in your portfolio. So also look at revenue growth.

3. PEG ratio

Of course, you also want to know if a stock is realistically priced or if it is actually too expensive. A useful indicator for this is the price / earnings ratio (P / E), where the share price is divided by earnings per share. shares. This figure indicates how much shareholders pay for one euro in profit per share. shares. If the P / E is high compared to peers, you are relatively expensive if you buy the stock.

However, this figure has one drawback: it does not take into account future growth, while of course it is very important for investors. Therefore, it is better to look at the so-called PEG ratio, an abbreviation of growth in price earnings† This figure combines the current share price with earnings per share. stock and future growth. You can calculate this figure by dividing the P / E ratio by the future revenue growth for the next 12 months.

If a company is properly valued, this figure should be 1. If the figure is lower, the stock is undervalued. If it is higher than 1, it is overrated. And if this number comes to 2, it is better to go around this share with a wide arc. Keep in mind that the PEG ratio is by definition subjective, as no one can predict the future.

4. Debt to equity ratio

Of course, it’s great if a business is growing significantly, but just check out how this growth is funded. If this is done through debt, it makes a company vulnerable if interest rates rise, the credit rating is lowered or the credit market dries out.

Therefore, also look at debt to equityratio, which represents the ratio between the company’s total debt and equity. A ratio of less than 0.1 is ideal. However, if it exceeds 0.5, the alarm bells should start ringing.

5. Forecast

Investors like to look ahead. The share prices are therefore not only based on current developments, but also on market expectations.

It is therefore wise to look in the press release of the quarterly figures for the expectations of the company for the rest of the year and possibly the years after. This may be the expected revenue and profit development, but also forecasts for the growth in market share.

Also note whether the company adjusts previously expressed expectations. If the forecast is subdued, it often leads to price pressure. But if the outlook is raised, the price often goes north. The market therefore often reacts more strongly to the outlook than to the figures presented.

6. Analyst statements

In addition to the forecast for companies, the views of analysts from investment banks are also important. They put the figures under a magnifying glass and compare them with those of the competitors.

Analyst reports, such as the IEX Investors Desk, often contain a wealth of information, such as a forecast, a comparison of the company with competitors, 12-month price targets and advice (sell, hold or buy).

Counseling and price target reductions sometimes lead to strong price reactions. Of course, analysts can sometimes make mistakes, but if you put different analyst reports next to each other, you get a good picture of a company.

7. Yield

The return on a share consists of two parts: any capital gain on the sale of the share and a dividend paid. Prices can fluctuate significantly on a daily basis, but dividends are a stable source of income for many companies.

The yield should therefore not be missing from this list of selection criteria. This shows the relationship between the dividend paid on an annual basis and the share price.

Mature companies usually distribute a fixed percentage of the profits to their shareholders. The average dividend on S&P 500 shares is around 2%. A yield of more than 3% is considered relatively high.

However, higher is not always better. Stocks with a dividend of more than 5% are usually unsustainable, and this often makes investors suspicious. In addition, keep in mind that the high dividend may also be the result of a lower share price. This figure may therefore give a distorted picture.

The editorial staff of IEX consists of a team of content managers, journalists and analysts, with more than a hundred years of combined experience in producing and publishing investment information and opinions. The information in this column is not intended as professional investment advice or as a recommendation to make certain investments. Editors may hold positions in one or more of the listed funds. Click here for an overview of their investments.

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