How to Evaluate Stocks for Investment

Learning how to evaluate a stock to decide whether or not it’s a good investment is a crucial skill. It’s always recommended to consult a professional about these matters, however, if you’re eager to learn such skills I’ve highlighted some of the basics below. I should clarify that this isn’t a thorough guide, rather, it’s an introduction to stock investment evaluations. The bare bones to what you need to consider before making any sort of investment.

It should also be pointed out that while you should learn to consider a stock’s growth and return, you should also work on being able to make a personal decision. Talk to people whose judgement you trust and also learn to examine a company’s status in relation to its competitors, the potential for its industry and how its managed.

How to Evaluate Stocks for Investment

So what are some of the basic financial ratios you should learn to review before making an investment?

Company’s Earnings

What are the company’s earnings? A company’s EPS or earnings per share is: “the company’s net income after taxes and preferred stock dividends divided by the average number of shares outstanding”. If you see that a company’s EPS has consistently increased over the years, you could consider it a safe investment.

Company’s Debt Level

What is the company’s debt level? If the company has high levels of debt it can become more susceptible to economic downturns.

Company’s Growth Rate

What is the company’s growth rate? This can be determined by examining company’s PEG ratio or Price/Earnings growth ratio,which has the standard value of one. A PEG ratio higher than one means that the stock is trading at a premium to its growth rate. Less than one means the stock is undervalued.

A Stock’s Return

What is the stock’s total return? To calculate a stock’s total return consider its dividends plus/minus changes in stock price divided by your purchase price. A good return, of course, means you should considering investing!

How to Evaluate Stocks for Investment

As I wrote in a recent article about getting the biggest annual return on your 401k, consulting a professional about investments will almost always help increase your earnings. Still, it’s important to learn as much you can about evaluating a prospective stock so you aren’t dependent on someone else– as the adage goes, knowledge is power.

How to Evaluate Stocks for Investment

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