Growing sales and profit:
Those companies which have the potential to grow its sales and profit i.e. their top line and bottom line can be a good bet for future. If the company sales are growing in faster rate year on year, it will attract big investors and large institutions to invest into it and eventually its demand will increase and so is the stock price.
This is one of the other crucial parameter which requires the attention of any investor. Always check the future of the industry to which company belongs is promising or not. If the industry is good then find if the company has some edge over its competitors. This approach is called top-down approach and helps in finding good sectors first and then select good companies in this sector.
Debt is something that eats away the profit of a company. So heavy debt ridden company should be avoided as any negative sentiment in an economy can impact these companies’ performance. For this you should track debt/equity This you can get from the balance sheet or ratio details on many websites. Increasing debt to equity ratio, or Debt to ratio greater than one is not preferable.
Always invest in stocks whose return on equity and return on capital employed is greater than 15% on average for every year. This simply means that the company is generating more returns for investors using the capital which is employed. An increasing ROE/ROCE over the years is very good.
Price To Earning Ratio:
This gives an indication of whether the stock is overpriced or not. Higher PE means people are ready to give more price as compared to its earning as a present. Compare the PE ratio of the company to the industry PE and you will understand if stocks are cheap or expensive.
This is often an ignored parameter as it is hard to get information about the management of a company. Management should be innovative and competent. This helps the company perform better as compared to its peers in the same sector. Management and promoters should not have tainted history or criminal cases against them.
Liquidity ratios :
Companies with a large amount of tangible assets are more solid and able to give their short-term debt. These companies are more stable and less risky. This can be measured using financial ratios like Quick ratios or current ratios. These ratios measure total current liquid assets/ total current liabilities. A quick ratio greater than 1 is preferable always.
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