Tips For Smart Stock Market Investing: How to Spot a Strong Company
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04:26:56 am on February 22, 2009 | # |
Analyzing a company in order to decide whether or not to buy its stock is a complex process. Famous investors like Warren Buffet and Peter Lynch strongly advise choosing a stock based on the financial health of the company. Most of the time stock investing is decided on the stock’s past performance itself. It is always suggested to do your due diligence if you were to invest in the stock market. Especially nowadays, in this economic downturn, most experts were proven wrong and market volatility is sometimes nerve wrecking.. Here are 3 things you can look for in the company’s financial statements that can tell you a lot about it’s strength.
Cash flow per share is the amount of current cash revenue running through the business, divided by the amount of shares outstanding. Why is this important? Because a business can have a strong balance sheet and still run aground due to lack of cash.
Here’s how that can happen. A balance sheet with a high amount of accounts receivable can potentially show a large, healthy profit. But the accounts receivable are amounts that are owed to the company, not available cash in the bank. If an emergency arises that requires more cash than the company has available (think of a tornado demolishing a warehouse full of inventory, and a high insurance deductible), the company can find itself strapped for cash.
At the very least, if it can borrow money, it will incur a new debt and decrease profits. At worst, if it can’t borrow money, it could end up going bankrupt or entirely out of business. So cash flow per share is an important indicator of a strong company. Cash is always king whether a company is small or the biggest. The present economy has proven this concept to be very true.
Current ratio is another important number to look at. It is a measure of current assets divided by current liabilities. It includes short term assets (cash, inventory, current accounts receivable) and short term liabilities (payments due within the fiscal year).
It represents the strength of a company to pay its regular operating expenses, unexpected expenses and how well it is positioned to take advantage of sudden opportunities. You’re looking for a minimum ratio of 2 to 1 (assets to liabilities). The larger the ratio, the better.
The last factor is its dividend yield. This is a measure of the cash dividend that a company pays, dividend by its current price. It’s important to look at the dividend yield over a 12-month period of time. A good dividend usually indicates a strong company’s financials.
What you are looking for is a dividend payment that does not change, but a yield that is increasing. That indicates that a company’s stock may be currently undervalued, and may be a good investment. This is especially true if the cash flow and current ratio numbers are strong.
Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at http://Invesmint.com