- how to pick great stocks
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1. Know the company
This cannot be overemphasised. Since you are buying ownership stake in the underlying company, you must get acquainted with the company. Know what it does and how it makes money. This can be done by visiting the company websites and reading its annual reports which are freely available.
2. Check the financial status
Read through the annual report and look for some items like the revenue, cash flow from operations and operating profit. You can get the cash flow from operations from the cash flow statement in the annual report. A company that generates cash flow can expand the business, pay dividends and settle creditors.
Operating profit can be obtained from the income statement or statement of operations. Operating profit is better than net profit or profit after tax because it ignores certain non-recurring items that can inflate the profit. It shows the profit the business would normally make from its core business and it is sustainable.
You can also get the revenue figure from the income statement. A company that grows revenue consistently is capable of making profit.
3. The debt level
A company can use debt to grow its business but the debt must be at a manageable level. The company must make enough profit to pay interest on the debt it obtains. The ratio of debt to shareholder's equity must not be too high. This information can be obtained from the statement of financial position
4. Pay the right price for the stock
A company may have a great financial strength but its share price is too high. Do not buy until the price is right. Your intention should be to buy low and sell high. If the price is too high, you cannot realise good return or you can lose when you sell. This means that the company may be great but the stock is not great for the investors.
5. Corporate governance
Dig deep to know whether the company's directors have relevant experience and good track record. Having misfits up there doesn't do the company any good. The leadership of the company must be of good quality.
