Factors to Consider When Investing in Stocks
September 07, 2017
Investing in stocks is trickier than other types of low-risk investments. A single wrong pick can lead to disastrous results. To put this into perspective, Metal and Minerals Trade Corporations of India(MMTC) share has declined consistently since 2010. From Rs. 1,290 on October 29, 2010, it has lost its price value by almost 96% in 2017, as it now stands at Rs. 56.90 (at the time of writing).
To make calculative decisions when investing in stocks, it’s important to consider some important factors which are:
- Company Business Model and Promoters Activities
The first thing to find out about a company you are interested in is the business model that it follows. What are the factors that make it stand from its competitors?
If the promoters of the company tend to raise capital again and again, it could mean that the company is not strong enough to generate surplus revenue on its own and so must be skipped. For instance, companies like Asian Paints and Colgate don’t have to raise fresh capital because they are self-dependant.
- Capital Reinvestment
A business that has potential will not only generate revenue but also reinvest the same back into the business to increase the returns. For instance, if a company is able to 20% return on capital employed (ROCE) in a year, then it should reinvest it so that it’s able to generate a minimum of 20% ROCE next year (usually it’s higher). If that’s not the case, it’s possible that something is wrong.
- Company’s EPS
A company’s EPS (Earnings Per Share) is a critical financial measure that can help making a decision easier when you are investing in stocks.
EPS is an indicator of a company’s profitability as it shows how much a company has earned per share and is calculated by dividing its total earnings with the total number of outstanding shares. The following simplifies the concept:
Total earnings of a company= Net income- preferred dividends
EPS= Total Earnings/outstanding shares
For example, if a company’s net income for a year is Rs. 5 crores and it paid Rs. 1 crore to its preferred shareholders, its total earnings would be Rs. 4 crores. If the total outstanding shares of the company were 10 crores, then EPS:
EPS= 4 crores/ 10 crores= Rs. 0.4
You can make learn from the EPS ratio on your own. Otherwise, there are firms that give ratings to the companies on their EPS ratio that you can refer to for an easy evaluation.
These were some of the most common factors to consider when investing in stocks. However, there are many other ways to predict the performance of a company such as debt to equity ratio, EBITDA, etc.