basic examination of Stock
basic examination of stock can be done by looking the company’s condition, whether it is a good company or not. Here are some criteria you need to check:
- The company is market leader in the industry. Market leader is one of company’s competitive advantages that differs them from other competitors. Company which is a market leader can raise their product or service price easier. Other competitive advantages you can look into are patent, strong customer base, brand and strong management.
- The company has low debt equity ratio. This method the debt is low compared to equity. With low debt, the company can borrow more money to expand their business. Companies with high debt equity ratio are also risky because when business turns bad; their huge debt can cause additional problems. Companies with high debt equity ratio will have to pay more interest for their debts.
- The company keeps growing each year. Asset and net income should grow every year.
- Current asset should be higher than current limitations. If the company needs to pay its current limitations they can pay it with their current asset.
- Low price earning ratio (PE) method the stock price is low enough compared to its earning. Low PE method the stock is cheap, but this does not average you should closest buy it. There are two reasons why stock has low PE. First the company performance is not good so not many people buy it, hence it is cheap. The second people do not realize that it is a good company and did not buy the stock. A better use is to combine PE with Earning per proportion (EPS) growth to get pin (Price Earning Growth) ratio. You can get pin by dividing PE with yearly EPS growth. It is advisable to look for companies with pin under 1. If the company has PE =10 and EPS is growing 15% yearly, then pin = 10/15 = 0.66 which is good.
- Pay attention to the profit. Analyze where it is coming. If it comes from operational profit, then it is good. But if it come from other supplies such as asset sale, then you need to consider it again as an investment.
- The company has high ROE (Return on equity). It is divided by diving net income with equity. High ROE is usually above 15% or 25% which depends on your country. In countries with higher inflation you need to find companies with higher ROE.
- Calculate stock fair price. If current price is below its fair price then we should buy it.
By knowing basic examination of stock, you can use it to choose stocks for option trading.