Stocks Value Investing Check List
1. Earning Per Shares (EPS)
Earning Per Shares = Net Profit minus dividend divided by number of shares
Preferred stocks shall compare this figure across five years to determine if the EPS is experiencing an upward trend. EPS figure shall also compared to other companies in the same industry.
2. Return on Equity (ROE)
Return on Equity (ROE) = Net Profit divided by Shareholders' Equity percentage
In general, ROE needs to be above 15% for a healthy company. It is a good sign if the ROE increase on year on year basis. Compared also ROE figure with other companies on the same industry.
3. Gross Profit Margin
Gross Profit is measures of how much the company earns from selling each product after deducting the cost for producing the product.
Gross Profit = Revenue - Cost of Goods Sold
Gross profit is needed to determine the gross profit margin. The gross profit margin allows us to determine if the company is a low or high cost producer among its competitors.
Net Profit Margin (%) = Gross Profit divided by Revenue x 100%
High Gross Profit Margins will indicate the following:
1 . The company has strong demand for the products
2. The Company is service based company
3. Strong economic moat for the company
Company with higher gross profit margin show that:
1. There is high demand for the products.
2. The company is able to keep the production cost lower than the competitors.
3. The company is the price leader and is able to price its products at a premium.
4. Net Profit Margin
Net Profit = Revenue - Cost of Good Sold - Total Expenses
From the gross profit margin, we will get to know the efficient in operating cost of the company.
Net Profit Margin = Net Profit divided by Revenue x 100%
Consistent high new profit margin of more than 15% show that the company has competitive advantage / monopoly in this business industry, We shall compare this with other competitor in the same industry to see whether this company has a competitive advantage. Further more the company shall also have consistent New Profit Margin of 15% and above.
5. Current Ratio
Current Ratio is a liquidity ratio that determine a company's ability to pay off short term obligations.
Current Ratio = Current Asset / Current Liabilities
Current liabilities are debts and other obligations that a company needs to pay within a year.
Current Asset is asset which is convertible into cash within the year.
Normally, a current ratio of more than 2 is consider healthy ratio. However, if the ratio is too high (> 4), it show that the company may be holding too much inventory, trade receivables or cash.
Too much inventory means that the company has bad planning, committing too much cash in inventory.
Too high trade receivables means that the company has higher risks of bad debts.
Too much cash mean that the company ineffective use of cash to grow the business.
6. Cash Ratio
Cash Ratio is also another liquidity ratio that check whether the company is able to pay off their short term debts/obligations.
Cash Ratio = Cash / Current Liabilities
The cash ratio shall be more than 1 to show that the company is considered healthy as the company has ability to pay off all their liabilities with their current cash.
If the cash ratio is more than 2, it will be a question that "why does this company holding so much cash?"