How to choose growth stock

How to select winning stock in the share market ?

I have spent more than 6 year in the share market. During this period I have observed that there are mainly two types of traders. One is short term trader and the other is long term trader. The timeframe for short term may be one day or one week or often they trade in many times in a single day. But almost all of these short term traders lost their money in the market according to me.

The other type of traders (long term investor) always look for the best stock. For this they use many type of resources like TV channel, broker, newspaper or any expert friend’s advice. According to me they should ask some questions before investing in any stock. Today, we will discuss some important things which each investor should know about the stock.

·        How the company earns its income ?

It is very important to know that how does the company make money. Know about company’s core business and check whether the profit comes from core business or any other company’s arm. It gives a better understanding of the company’s risk and potential profits. Read company’s most recent annual report for detail about company’s business unit, its sales and earnings. You will go through other figure like EPS, net income etc.

As a shareholder, you should keen to know how much company have cash because it indicate the company’s dividend paying capacity or reinvestment in the core operation which can increase profit in the future.

·        Is financial documents are showing real picture ?

Some smart accountant and CFO’s show the rosy picture of the company and hide the real position of the company. In the books, sales revenue comes much before realization and it is very difficult to know whether it is real or not. Be alert to those companies whose sales figure increase very rapidly than other players in the same industry.

Many times to beat short term market expectation, the companies combined the sales of other arms also and show the average. For this they do many acquisitions in a very short period and in the long run integrating all these acquisitions prove messy and costly.

·        Is broader economy impacting to the company ?

Some company’s performance heavily depend on the state of the economy. These stocks are known as highly cyclical stocks. You should also know the interest rate moment in the economy. For example, if interest rate moving down then home loan, retail, appliance manufactures sector likely to perform well.

·        Do you know the real worth of the company ?

You must assess the company’s promoter and management team. Although it is not easy for every person but try your best to acquire the information. Check the debt figure on the balance sheet as too much debt increase the risk for the company’s debt servicing capacity in case of sales down or economy recession. Find those factor which can really hurt the profit growth in future like if the company is dependent on one client for its income. Compare its performance with its peer companies on year on year basis. Check the P/E ratio, if the best company available in cheap rate for any reason. Analyze the company’s future earning potential.  Avoid herd mentality when picking the stock.

Dear investor, if you invest on the basis of above discussed points, you will hardly go wrong. After this you always feel comfortable that you have invested after investigating the stock, in other word you have not gambled with your long term investment.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Some Important Financial Documents & important Ratio - Part 2

Financial Documents & Important Ratio – Part 2

 WE had discussed in our previous blog about some important financial documents and financial ratio. Some ratio we had discussed in previous article and rest we will discuss today.

Debt/equity ratio: We can get it dividing long term debt by common shareholder’s equity. A company with higher debt/equity ratio consider risky. It is good tool to measure of a company’s leverage.

Dividend payout ratio: It is very important ratio to know. As for long term investor it is very important to know how much the company dividend paying from its profit. No matter how much company is earning. It is dividend that matter to equity investors.

Earning multiple: It is very famous ratio to measure a particular stock is available in cheap or costly. The earning multiple is equal to stock’s market capitalization divided by its after tax earning over a period of time. If a blue chip company is trading with high earning multiple its means the investor are more confident about the company’s future growth. It is used to measure for how expensive a stock is available in the market.

Earning per share or EPS : We can get it from total earning divided by the number of outstanding shares. It is also very important to know that how much company is earning per share.

Price to book ratio: When we divide a stock’s market capitalization by its book value. We get price to book ratio. For Value investor it is very important financial ratio. A low ratio may be good opportunity for value investor. It compares the market’s valuation of a company to the value of the company according to its financial statements.

ROA or Return on Assets:  It shows company’s profitability by company’s earning divided by its total assets.

ROC or Return on Capital: It reflects how effectively a company uses its money invested in the operations. So it is also very important ratio. We can get it from dividing net operating income after taxes by total asset involved in operation.

ROCE or Return on Capital Employed: It reflects the efficiency with which capital is being utilized to generate revenue by company. It is calculated from profit before interest and taxes divided by the difference between total assets and current liabilities.

ROE or Return on Equity: It actually reflects that how much profit the company is able to generate from the resources provided by shareholder. Investor often tends to the companies which have high ROE with growth.

ROTA or Return on Total Assets: It shows how effectively a company uses its assets. A company without good ROTA faces difficulty to generate a expected ROE.

Working Capital: We can get it deducting current liabilities from current assets. If companies that have a lot of working capital will be more successful compare with those companies which have negative working capital.

Total asset turnover: Net sales divided by total assets shows total asset turnover. It reflects companies capability of assets using to generate revenue.

There is many more ratio which you can analyse before invest in the company’s stock. I assume it would be very useful to all equity investors.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com