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6 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.

I had written an article previously that looked at three financial metrics investors can use to help them speed up their vetting. It can be found here.

Let’s run through another three metrics investors can use.

4. Free cash flow

Free cash flow, or FCF for short, is an important metric to analyse as it represents the cash generated by a company after it has spent the cash required to maintain or expand its businesses. It is an important measure of a company’s financial performance and is calculated as follows: Operating Cash Flow minus Capital Expenditures.

The FCF can also give investors clues about a company’s ability to pay a dividend. If the FCF produced by a company is substantially higher than the dividends paid, this is one sign that the company’s dividend is well-protected.

5. The net cash (or net debt) position

A company’s net cash is established by deducting the Total Debt on its balance sheet from its Cash and Cash Equivalents. If the number is positive, it means the company is in a net cash position; if it is negative, that means the company is in a net debt position.

So, what is debt? Basically it is the amount of money owed by a company to its creditors. There are numerous reasons why companies take on debt, and that is what should be explored by investors.

This reminds me of what Peter Lynch, a highly successful investor, once wrote: “Companies that have no debt cannot go bankrupt.” Lynch’s statement is quite self-explanatory and goes to show how debt can cause serious problems when the economy or the industry a company is operating in takes a turn for the worse.

6. The return on equity

Investors can also look at a company’s Return on Equity, or ROE. The ROE is a measure of how much profit a company generates with the capital shareholders have invested in the business. It is normally presented as a percentage.

The ROE is useful because it shows investors how savvy a company’s management is in investing and using shareholders’ capital. A low ROE could indicate poor investment decisions by management, although this might not always be the case.

The three metrics we’ve seen here, along with the three mentioned in the previous article, can help serve as a quick filter for investors to decide if a stock is worthy of a deeper look or if it makes more sense to move on.

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