Why? because value always wins above any other trading strategies.
Cumulative growth for the last few years needs to be taken into account while investing in a company. Earnings per share (EPS) indicates the company’s profitability. Price to Earnings Ratio (P/E) is the ratio of EPS to the company’s share price.
- Find stock with a dividend yield with at east 3%
- Consistent dividend growth in the last three years
- Find stocks with DRP: Dividend Reinvestment Plan
2. Demonstrated consistent earnings growth
Companies that have increased earnings year after year with no deficit are a safer choice. Using this principle, you minimise your risk by investing in the safest companies in a particular industry or sector. We are looking for positive earnings growth that gives the power to the firm to “turnaround” negative situations
- Check income statement, balance sheet, cash flow statements
- Use the last three or four years as the track record.
- Find consistent growth in total revenue, gross profit
3. Price-to-earnings ratio (P/E ratio)
The price-to-earnings ratio (P/E ratio) is a metric that helps investors determine the market value of a stock compared to the company’s earnings. In short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings.
The P/E ratio is important because it provides a measuring stick for comparing whether a stock is overvalued or undervalued. A high P/E ratio could mean that a stock’s price is expensive relative to earnings and possibly overvalued. Conversely, a low P/E ratio might indicate that the current stock price is cheap relative to earnings. Since the ratio determines how much an investor would have to pay for each dollar in return, a stock with a lower P/E ratio relative to companies in its industry costs less per share for the same level of financial performance than one with a higher P/E ratio. Value investors can use the P/E ratio to help find undervalued stocks.
- P/E Ratio of 9.0 or less,
- The above is the same as P/E Ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
- Higher growth firms will have higher P/E ratios
- Higher risk firms will have lower P/E ratios
- Firms with lower reinvestment needs will have higher P/E ratio
- The trick here is to invest in companies with a Companies that sell for low prices compared to EPS are often undervalued, meaning the value should increase.
Note: This criterion doesn’t take into account high growth companies and that P/E ratios differ by sectors/industries. Hence, always look at the P/E ratios of the company’s competitors before deciding.
3. Price-to-Book Ratio
The price-to-book ratio or P/B ratio measures whether a stock is over or undervalued by comparing the net value (assets – liabilities) of a company to its market capitalization. Essentially, the P/B ratio divides a stock’s share price by its book value per share (BVPS). The P/B ratio is a good indication of what investors are willing to pay for each dollar of a company’s net value.
The reason the ratio is important to value investors is that it shows the difference between the market value of a company’s stock and its book value. The market value is the price investors are willing to pay for the stock based on expected future earnings. However, the book value is derived from a company’s net value and is a more conservative measure of a company’s worth.
- A P/B ratio of 0.95, 1, or 1.1 means the underlying stock is trading at nearly book value. In other words, the P/B ratio is more useful the greater the number differs from 1.
- To a value-seeking investor, a company that trades for a P/B ratio of 0.5 is attractive because it implies that the market value is one-half of the company’s stated book value.
4. Debt-to-Equity Ratio
Debt ratio = total farm liabilities / total farm assets. The debt-to-equity ratio (D/E) is a stock metric that helps investors determine how a company finances its assets. The ratio shows the proportion of equity to debt a company is using to finance its assets.
Debt-to-equity ratio can vary from industry to industry. A high debt-to-equity ratio doesn’t necessarily mean the company is run poorly. Often, debt is used to expand operations and generate additional streams of income. Some industries with a lot of fixed assets, such as the auto and construction industries, typically have higher ratios than companies in other industries.
- This indicates the number of dollars of debt for every dollar of asset value. Generally a ratio of less than 0.25 is considered very strong, a 0.25 to 0.40 ratio is satisfactory and more than 0.40 is weak.
- A low debt-to-equity ratio means the company uses a lower amount of debt for financing versus shareholder equity. A high debt-equity ratio means the company derives more of its financing from debt relative to equity. Too much debt can pose a risk to a company if they don’t have the earnings or cash flow to meet its debt obligations.