3 Quick Things To Consider When Studying A Stock

Finding good companies to invest in can often be a challenge. There are literally tens of thousands of listed companies for investors to choose from globally.

Let’s look at three financial metrics investors can use to help them speed up their vetting.

1. Earnings per share

Earnings per share, or EPS for short, tells investors how much profit a company is making on a per share basis. This number is derived by dividing the company’s net income by the number of shares it has outstanding.

On its own, the EPS figure doesn’t tell investors much. But, it can be used to calculate the price-to-earnings ratio, which is often abbreviated as the PE ratio.

As an example, if a company is trading at a price of S$3 per share, and has EPS of S$0.30, it means the company has a PE ratio of 10. In this instance, investors are paying $10 for each dollar of profit the company makes.

Another way to look at the PE ratio is that it tell us the number of years a company will take to make back in earnings, what you paid for its stock (assuming the earnings doesn’t change).

2. Price to book ratio

The book value of a company is derived by dividing its shareholder equity (calculated by deducting total liabilities from total assets) by the number of shares outstanding.

If a company has a positive book value (and it is often the case that a company will have a positive book value), it means that if the company were to close the next day by liquidating all its assets and settling all its liabilities, its investors should theoretically be able to receive some cash. And in theory, the cash will be equal to the book value.

So, by dividing a company’s stock price with its book value, it gives the company’s price to book (PB) ratio, which allows investors to quickly assess if they are paying a premium for, or getting a discount on, a company’s assets.

As an example, a company with a trading price of S$3.30 and a book value of S$3 would have a PB ratio of 1.1. This means investors are paying a premium for the company’s assets.

3. Dividend payout

Investors can look at the consistency of a company’s dividend pay-outs over the past five to 10 years. This could be useful because it is a gauge for how well a company has maintained or grown its business over time.

But, investors should also watch how a company is funding its dividends. Is it paying dividends from its earnings or is it borrowing money to support its pay outs? The latter is a yellow flag, at least.

The three metrics we’ve seen can help serve as a quick first-layer filter for investors to decide if a stock is worthy of a deeper look or if it’s better to simply move on.

Note: Three more metrics have since been shared. You can find it here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.