Stock Research Using Fundamental Analysis: Part II
I will now address “additional” fundamental statistics that need to be studied before purchasing a company’s stock. Keep in mind that a company’s statistics are extremely important when evaluating which company to buy stock in! Remember these statistics will be conveniently provided for you on financial websites such as Yahoo Finance or Google Finance.
One statistic an investor needs to research is the market capitalization of a company. This is the market value of the shares outstanding at a point in time. Market cap is the best measure of a company’s size. This can be found easily by typing the stock symbol into a financial website.
Pay attention to the market cap! Is the company growing or losing market capitalization over time? One great way to monitor changes in a company’s market cap, and other important statistics, is by setting up a spreadsheet for each company you invest in. This will alert you to any important fundamental changes in your company’s stock.
There are large-cap, mid-cap, and small-cap stocks. In addition to these, there are mega-cap, micro-cap, and nano cap stocks. Normally, large-cap stocks are established companies that are considered stable and less risky. Small and mid-cap stocks, on the other hand, are riskier but can have potentially larger gains. However, there is no cut off value today.
Another important statistic to study is return-on-equity. This is usually indicated by a percentage and lets the investor know how effective management is. Return-on-equity indicates the profit not being paid out in dividends to the stockholder. Instead, often the company retains and reinvests its’ profits. This figure will tell you if the company is using its investments well to grow earnings.
I, personally, like to see return-on-equity 15% and, preferably, 20% and higher! A higher return on equity is usually a “pricier” stock than one with a lower return-on-equity. This financial ratio will also help the investor to compare companies in the same industry.
I will now address another important stock measurement to research: the current ratio. This lets you know if the company has the ability to pay its’ short-term bills. The company needs to be well prepared for short-term obligations.
The current ratio divides current assets by current liabilities. Once again, this figure will be provided for you on the financial website of your choosing. Current assets are things like cash, inventory, and accounts receivable. Current liabilities are everything a company owes such as short-term debt or accounts payable. I prefer to see a company with a minimum current ratio of 2-1.
Another statistic an investor should look at is the 52-week range of the company’s stock. These figures can be found online in a stock’s quote summary. The 52-week range will tell you the lowest and highest prices of the company’ stock over the preceding year. For example, the company NextEra Energy’s (NEE) 52-week range is $144.70-$173.06. Currently, as of this writing, the stock is at $170.93.
An investor should also make sure the company has adequate cash flow. Cash flow is the money moving in and out of a business and is shown on the Cash Flow Statement. You want to invest in a company that generates positive cash flow. “Free” cash flow should also be positive as it is an important metric for measuring the company’s performance. It is important to make sure the company has ample cash reserves.
In conclusion, do not purchase your stock without studying the company’s fundamentals (statistics) first. Financial websites will provide the investor with the fundamentals of a company. Create a spreadsheet for “each” company you invest in to assist you in monitoring each of your companies statistics long-term.
As an Accountant and D-I-Y Investor, I perform extensive financial market research of each and every company before I purchase its’ stock. I study the company’s fundamentals, financial statements, quarterly and annual reports, and management. All of the information I need is conveniently provided for me online.