Quick Stock Analysis
To determine if a stock might be worth looking at further there are ten things I look for. Everything Money on Youtube and their 8 Pillars does a really good job doing a quick analysis and here is an overview by CNBC. Last, consider the advice of Warren Buffet.
Here are the ten things I look for:
P/E Target
16% or below. If looking at a growth company 20%
The P/E ratio measures the relationship between a company's stock price and its earnings per issued share. This measure is used universally to analyze stocks.
The historic average is 15 to 16%. I look at companies 16% or below.
Net Profit Margin Target
10% or greater
Net profit margin is a measure of profitability. Net profit margin = Net income/revenue.
There are two other types of profit margin. Gross profit margin and operating profit margin
Here are general historical guidelines:
Low - 5%
Average - 7.71%
Healthy - 19%
High - 20%
Revenue Growth Target
3 years initial review but 5 or more years
Revenue growth over at least 3 (preferably 5 to 10) years. Go to company web site to verify revenue information
Net Income Growth
3 (preferably 5 to 10) years or more.
Net Income (Profit) growth over at least 3 (preferably 5 to 10) years. Go to company web site to verify revenue information. Found in the income statement
Outstanding Shares Target
Same or less outstanding shares over at least 3 years (preferably 5 to 10 years).
Outstanding shares refer to a company's stock currently held by all its shareholders.
Revenue/ Outstanding shares. Want this ratio to stay the same or increase in value. One way to make this ratio larger is when a company buys back shares (Apple for example) vs. make the ratio smaller by diluting shares (Tesla for example)
Found in the Income statement
Want current ratio greater than 1.5. Can compare industry ratios later if you decide it is worth further investigation
Current Assets > Current Liabilities
Current ratio (current assets/current liabilities. Warren Buffet likes a current ratio of 1.5 or greater) and Quick ratio (same as current ratio except subtract the total value of inventoried first. The quick ratio is more conservative than the current ratio) are the two ratios commonly used. Compare the ratios to companies within the industry.
Go to the Financials section of Yahoo Finance and select Balance Sheet. Then check Current Assets under Assets and Current Liabilities under Liabilities.
Operating Cash Flow > Capital Expenditures
Want more cash in than cash out
Free Cash Flow
Free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures
Go to the Financials Section of Yahoo Finance and click on the Cash Flow section. Look for the Operating Cash Flow and Investing Cash Flow sections. In the Investing Cash Flow section look for the Net PPE Purchase and Sale section. Now calculate Operating Cash Flow - Net PPE Purchase and Sale section.
Price to Free Cash Flow ratios 20% or below
Why? Better chances of returns of 10% or greater
Price to Free Cash Flow Ratio
How to come up with a fair market value of a company. Price to Free Cash Flow Ratio = Market Capitalization (multiply the number of outstanding shares by the current market value of one share )/Free Cash Flow
Debt equity ratio below 0.5%
Debt to Equity Ratio
The biggest threat to a company is not being able to repay debt. Warren Buffet uses the Debt to Equity Ratio which is calculated by taking Total Debt/Total Shareholders Equity.
Business will be around for 15 to 30 years
Stock Has Long Term Prospects
Warren Buffet questions whether the product or service offered by the business will be used 30 years from now. For technology companies I use a time frame from 15 to 20 years.
Holding stocks long term also reduces the taxes paid.