Finding great companies: What you want to see on their financial statements?

Finding great companies: What you want to see on their financial statements?

If you're committed to finding great companies and investing in them, it is time to state clearly what you should actively seek out on financial statements.  Here now is what you should hope to find when you're studying the report of a company that you're considering for investment. 

https://myinvestingnotes.blogspot.com/2010/06/finding-great-companies-what-you-want.html

Main Points of the Article:

1. The Ideal Profile: Look for companies with a cash-rich, asset-light business model that demonstrate operational dominance, pricing power, and financial resilience—similar to Microsoft or Coca-Cola.

2. Balance Sheet Checklist:

   • Lots of Cash: Provides safety and funds growth without external help.

   • Low Flow Ratio (<1.25): The key metric. Indicates operational efficiency and supply chain power: low inventories/receivables and strategically high payables.

   • Manageable Debt: Debt is a tool, but prefer companies with more cash than long-term debt.

3. Income Statement Checklist:

   • High & Consistent Revenue Growth: Sign of strong demand (8-10%+ for large caps, 20-30%+ for small caps).

   • High & Stable Gross Margin (>40%): Indicates a "light" business with pricing power and a competitive moat.

   • Rising R&D Spending: An investment in future growth (especially for tech/pharma).

   • Full Tax Rate (~34%): A quality-of-earnings check. Be wary of profits boosted by temporary tax credits.

   • Strong & Rising Net Profit Margin (>7-10%): The result of a successful, defensible business model.

4. Cash Flow Statement Mandate:

   • Positive Operating Cash Flow: A non-negotiable sign of a self-sustaining business for public companies. Investigate any negatives deeply.

5. Critical Overarching Principles:

   • Context is Key: No rule is absolute. Metrics must be judged relative to industry norms and company life cycle.

   • The "Why" Matters: The story behind the number (e.g., why inventories are high) is more important than the number itself.

   • This is a Quality Filter, Not a Valuation Tool: The checklist identifies great businesses, but does not tell you if the stock is a good buy at its current price.

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Article Summary:

This article provides a practical, fundamentals-based checklist for identifying high-quality companies with durable competitive advantages. It moves beyond simple profitability to focus on operational efficiency, financial strength, and strategic positioning.

The core philosophy seeks businesses that generate so much demand and possess such market power that they:

• Sell inventory quickly.

• Collect payments from customers upfront (low receivables).

• Can delay payments to suppliers (high payables), using that cash as interest-free financing.

• Fund all growth internally with abundant cash, avoiding excessive debt.

The guidelines emphasize looking for strengthening financial trends—rising margins, growing cash, and efficient use of capital. It stresses that while few companies are perfect, this framework helps investors ask the right questions, distinguish operational brilliance from financial distress, and ultimately find businesses built to thrive and generate real wealth over the long term.

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A detailed discussion

This is a highly practical guide to fundamental analysis, focused on identifying high-quality, well-managed companies with sustainable competitive advantages. It moves beyond simple profitability to assess operational efficiency, financial strength, and strategic positioning. Let's break down, discuss, and summarize the key points.

Core Philosophy: The "Ideal" Business Model

The article champions a specific, powerful business archetype: the cash-rich, asset-light operator with pricing power. Think Microsoft or Coca-Cola. These companies:

• Generate products/services with high demand (high revenue growth).

• Have low capital intensity (high gross margins).

• Exercise such market strength that they get paid upfront by customers (low receivables) and can delay paying their suppliers (high, strategic payables), all while holding minimal inventory.

• Use this operational dominance to fund growth internally (plentiful cash, minimal debt).

Summary & Commentary on Key Guidelines

1. Balance Sheet: The Fortress of Financial Health

• Lots of Cash: The ultimate safety net. It provides optionality for investment, acquisitions, or weathering downturns without relying on external capital. Comment: While crucial, context matters (e.g., a mature tech giant vs. a fast-growing biotech startup). The key is why the cash is there and how it's being (or not being) deployed.

• Low Flow Ratio (<1.25): This is the article's most nuanced and insightful metric. It measures operational efficiency and supply chain power.

  • Low Numerator (Non-cash Current Assets): Means the company isn't tying up cash in inventory (it sells quickly) or waiting on customers to pay (it collects quickly).

  • High Denominator (Non-debt Current Liabilities): Means the company is using its suppliers' money as interest-free financing—a sign of strength, not weakness, if done from a position of cash abundance.

  • Comment: This is a brilliant way to separate operational genius from financial distress. The caveat about small-caps is vital; they lack the clout of giants, so a higher ratio isn't automatically a red flag.

• Manageable Debt: Debt is a tool, not a sin. The guideline wisely avoids a hard rule, favoring a preference for companies with "more cash than long-term debt." Comment: The debt-to-equity assessment must be industry-specific (utilities vs. software). The critical questions are: What is the debt for? Can operating earnings easily cover interest payments?

2. Income Statement: The Engine of Profitability

• High Revenue Growth: The primary indicator of demand. The article sets good benchmarks: 8-10%+ for large caps, 20-30%+ for small caps. Comment: Sustainable growth is key. Growth from acquisitions or price hikes alone is less robust than organic, volume-driven growth.

• Controlled Cost of Sales & High Gross Margin (>40%): This is the moat indicator. A high and stable/rising gross margin shows pricing power and an ability to scale efficiently. The "light business" bias is clear—intellectual property and software are favored over heavy manufacturing. Comment: Absolutely critical. A shrinking gross margin is often the first sign of competitive pressures.

• Rising R&D: Framed as an investment in the future, especially for relevant sectors. Stagnant or falling R&D can signal a company is milking a legacy business at the expense of its future. Measuring it as a % of sales is smart.

• Full Tax Rate (~34%): A clever quality-of-earnings check. Companies using loss carryforwards or other credits boost current earnings artificially. "Taxing" them at the full rate reveals the true, sustainable profit growth.

• Strong & Rising Net Profit Margin (>7-10%): The bottom-line result of all the above. High margins in a capitalist system signal a successful defense against competition. As the article notes, some great businesses (e.g., high-volume retailers) operate on thin margins, but they are exceptions that prove the rule.

3. Cash Flow Statement: The Reality Check

• Positive Operating Cash Flow: Non-negotiable for a mature public company. Earnings are an opinion; cash is a fact. Negative operating cash flow means the business isn't self-sustaining. Comment: This is the ultimate litmus test. You must investigate the reason for any negativity (e.g., a temporary inventory build for a hot product vs. soaring receivables because customers won't pay).

Critical Discussion Points & Caveats

1. The "Ideal" is Rare: The author admits few companies hit all marks. The checklist is a framework for excellence, not a pass/fail test. It helps you compare companies and ask the right questions.

2. Industry Context is Everything: Applying these rules rigidly across sectors is a mistake. Comparing the flow ratio of a software firm (low inventory, high payables) to a supermarket chain (high inventory, low payables) is meaningless. The guidelines work best for evaluating companies within their peer group.

3. The "Why" is More Important Than the "What": This is the article's most important lesson. A high flow ratio could be brilliant or disastrous. Spiking inventory could be mismanagement or preparation for a blockbuster launch. Your job as an investor is to discover the narrative behind the numbers.

4. No Valuation Consideration: The article explicitly stops at quality identification. A great company can be a terrible investment if you pay too much. The next critical step is to determine if the company's stellar characteristics are already reflected in an inflated stock price, or if there's an opportunity to buy a wonderful business at a fair price.

5. Quality of Earnings: The guidelines subtly emphasize this throughout (tax rate, cash flow vs. net income, receivables). They push you to ask: "How sustainable, real, and repeatable are these profits?"

Final Summary: The Investor's Checklist

You are looking for a company that demonstrates:

• Operational Dominance: Low Flow Ratio. It controls its working capital cycle like a master, collecting fast and paying slow because it can.

• Financial Fortress: Ample cash, minimal (or smartly used) debt. It is self-funding and low-risk.

• Profitable Growth: Strong, consistent revenue growth combined with high and expanding margins (both gross and net). It sells more while keeping more of each dollar.

• Real Cash Generation: Consistently positive cash flow from operations. The profits are genuine and liquid.

• Future Focus: Willingness to reinvest in the business (R&D) to maintain its competitive edge.

• Clean Accounting: Pays close to the full corporate tax rate, suggesting earnings are not being boosted by non-recurring credits.

In essence, you are seeking a business that is not just profitable, but efficiently, powerfully, and sustainably profitable, with a model that throws off excess cash and fortifies itself against competition and hardship. This framework provides a powerful lens to separate truly exceptional businesses from merely adequate ones.

Stock Picking Strategies of various Gurus

Stock Picking for Noobs

June 11, 2007 20076 12:06 pm | In Finanducation | Comments Off

Who best to learn but from the gurus themselves? Here's a brief list of gurus and their strategies:

1. Benjamin Graham – Value Investing Guru

Strategy: Buy shares at price well below company's intrinsic value!

Indicators:

• P/E < 15 for average earnings over last 3 fiscal years (or current P/E whichever is higher)
• No financial/technology stocks
• Annual Revenue > $340 million
• Liquidity: Current Assets/Current Liabilites > 2
• Industrial companies: Long-term debt < Net current assets
• EPS increases > 30% over 10-year period, must not be negative within last 5 years.
• (Price-to-book ratio)*(P/E) < 22

Source: NASDAQ, Kiplinger, Forbes

2. Peter Lynch – P/E Growth Guru

Strategy: Divide attractive stocks into different categories.

Indicators:

a. Fast Growers:

• Little debt, Debt to Equity Ratio < =1
• Annual EPS Growth Rate = 20 to 30
• Current P/E < = 1.75*Annual EPS Growth

b. Slow Growers:

• High dividend payouts
• Sales > $1 billion
• Low yield-adjusted PEG ratio
• Reasonable debt-to-equity ratio

c. Stalwarts:

• Moderate earnings growth
• Potential for 30-50% stock price gains over 2 year period if bought at attractive prices
• Positive earnings
• Debt-to-Equity ratio < 0.33
• Sales rates increasing inline with, or ahead of inventories
• Low yield-adjusted PEG ratio

Source: NASDAQ, MSN Money, AAII Journal

3. Martin Zweig – Conservative Growth Investor

Strategy: To be fully invested in the market when the indications are positive and to sell stocks when indications become negative.

Indicators:

• Quarterly earnings positive and growing faster than:

• –1 year ago
• –last 3 quarters
• –last 3 years

• Sales growing as fast or faster than earnings
• P/E > 5; BUT P/E < 3*Market P/E or 43, whichever is lower
• No high level of debt, below-average for industry

Source: NASDAQ,MartinZweig.org

4. Brothers David and Tom Gardner of Motley Fool – Small-Cap Growth Investor

Strategy: Search for stocks of small, fast-growing companies with solid fundamentals.

Indicators:

• Health profit margins
• Little debt
• Ample cash flow
• Respectable R&D budgets
• Tight inventory congtrols

Source: NASDAQ

5. Kenneth Fisher – Price-to-Sales Investor

Strategy: The lower a company's stock price is relative to its sales, the more attractive its stock is.

Indicators:

• Strong balance sheet with little debt
• Low Price-to-sales ratios

Source: NASDAQ

6. David Dreman – Contrarian

Strategy: Search for deep-discount value stocks.

Indicators:

• Good earnings growth
• Low P/E
• Low P/B Ratio
• Low Price-to-Cashflow Ratio

Source: NASDAQ, Investopedia

7. James P. O'Shaughnessy – Growth/Value Investor

Strategy: 2 investment strategies: "Cornerstone Growth" and "Cornerstone Value"

Indicators:

a. Cornerstone Growth

• Market value > $150 million
• Price-to-sales ratio < 1.5
• Persistent earnings growth, among market's best performers over prior 12 months

b. Cornerstone Value

• Market cap > $1 billion
• Revenue > 50% greater than mean of market's 12 month sales
• Cashflow per share > average publicly-traded company
• Yield Factor: Company which has highest dividend yield from 50 shortlisted using above criteria.

Source: NASDAQ, Forbes

http://boringest.blogasian.com/category/finanducation/

Core Value Equity - Security Selection Process

Finding great companies: What you want to see on their financial statements?

If you're committed to finding great companies and investing in them, it is time to state clearly what you should actively seek out on financial statements.  Here now is what you should hope to find when you're studying the report of a company that you're considering for investment.  


What you want to see on a balance sheet?

1.  Lots of Cash

• Cash-rich companies don't have trouble funding growth, paying down debts, and doing whatever they need to build the business.  
• Increasing cash and equivalents is good.

2.  A low Flow Ratio


Flow ratio
=  (Current assets - Cash) / (Current Liabilities - Short term Debt)
=  Noncash Current Assets / Noncash Current Liabilities

Ideally, a company's flow ratio is low.  Once cash is removed from current assets, we are dealing almost exclusively with accounts receivable and inventories.  In the very best businesses, these items are held in check.  Inventories should never run high, because they should be constantly rolling out the door.  Receivables should be kept as low as possible, because the company should require up-front payments for its products and services.

So we certainly want the numerator of the equation (current assets minus cash) to be held low.

What about the denominator (current liabilities minus short-term debt)?  Rising payables indicate one of two things:

• either the company cannot meet its short-term bills and is headed for bankruptcy, or 
• the company is so strong that its suppliers are willing to give it time before requiring payment.  

You can be sure that companies in the latter category use their advantageous position to hand on to every dollar they can.   Again, think of every unpaid bill as a short-term, low-interest or interest-free loan.  If a company has plenty of cash to pay down current liabilities but doesn't, it is probably managing its money very well.  Those are the companies that we are looking for.

Ideally, we like to see this flow ratio sit low.  The very best companies have:  (1) Plenty of cash  (2)  Noncash current assets dropping (inventories and receivables are kept low) and (3)  Rising current liabilities (unpaid bills for which cash is in hand).

You'll prefer the flow to be below 1.25, which would indicate that the company is aggressively managing its cash flows.

Inventories are down, receivables are down, and payables are up.  This is a perfect mix when a company has loads of cash and no long-term debt.  Why?  Because it indicates that while the company could (1) afford to pay bills today and (2) doesn't have to worry about rising receivables, they are in enough of a position of power to hold off their payments and collect all dues up front.

When the flow ratio is high, another red light whirs on the balance sheet.

It must be noted here, however, that larger companies generally have lower flow ratios due to their ability to negotiate from strength.  Thus, don't penalize your favorite dynamically growing small-cap too much for a higher flow ratio.


3.  Manageable debt and a reasonable debt-to-equity ratio

Investors have very different attitudes toward debt.  Some shun it, choosing to not invest in companies with any or much debt.  This is fine and can result in highly satisfactory investment performance results.  But debt shouldn't be viewed as completely evil.  Used properly and in moderation, it can help a company achieve greater results than if no debt is taken on.

Debt can be good for companies too.  Imagine a firm that has a reliable stream of earnings.  Let's say that it raises $100 million by issuing some corporate bonds that pay 8 percent interest.  If the company knows that it earns about 12 percent on the money it invests in its business, then the arrangement should be a very lucrative one.

Note, though, that the more debt you take on, the greater your interest expense will be.  And this can eat into your profit margins.  At a certain point, a company can have too much debt for its own good.  Another feature of debt (or 'leverage') is that it magnifies gains and losses (just as buying stock on margin means that your gains or losses will be magnified).  Debt, like anything, is best taken in moderation.

To finance their operations, companies need sources of capital.  Some companies can survive and grow simply on the earnings they generate.  Others issue bonds, borrow from banks, issue stock, or sell a chunk of the company to a few significant investors.  The combined ways that a company finances its operations is called its "capital structure."  If you take the time to evaluate a company's debt, it could be worth your while.  Properly managed debt can enhance a company's value.

When you calculate debt-to-equity ratios for your companies, remember that there really isn't a right or wrong number.  You just want to make sure that the company has some assets on which to leverage its debt.  To that end, look for low numbers, ideally.  A debt-to-equity ratio of 0.05 isn't necessarily better than one of 0.15, but 0.65 is probably more appealing than 1.15.  You should also evaluate the quality of the debt and what it's being used for.  If you see debt levels spiking upward, make sure you research why.  Certainly, long-term debt can be used intelligently.  But in our experience, the companies in the very strongest position are those that don't need to borrow to fund the development of their business.  We prefer those companies with a great deal more cash than long-term debt.



Are any of our balance sheet guidelines hard-and-fast rules?  No.

We can imagine reasonable explanations for each.

• A company can run inventories very high relative to sales in a quarter, as they prepare for the big Christmas rush, for example.  So, inventories may be seasonally inflated (or deflated) in anticipation of great oncoming demand.
• And accounts receivable may be a tad high simply by virtue of when a company closed out its quarter.  Perhaps, the very next day, 75 percent of those receivables will arrive by wire transfer.  Here, the calendar timing of its quarterly announcement hurt your company.
• Rising payables can also be a very bad thing.  If the company is avoiding short-term bills because it can't afford to pay them, look out!
• Finally, flow ratios can run high for all the reasons listed above.

Having qualified our assertions, we still believe that the best businesses

• have such high ongoing demand that inventories race out the door, 
• product distributors pay for the merchandise upfront, 
• the company has enough cash to pay off payables immediately but doesn't, and 
• future growth hasn't been compromised by present borrowing.  

Look to companies like Coca-Cola and Microsoft to find these qualities fully realised.


What you want to see on the income statement?

1.  High Revenue Growth


You will want to see substantial and consistent top-line growth , indicating that the planet wants more and more of what your company has to offer.  Annual revenue growth in excess of 8 - 10 percent per year for companies with more than $5 billion in yearly sales is ideal.  Smaller companies ought be growing sales by 20 - 30 percent or more annually.

2.  Cost of Sales under wraps


The Cost of sales (goods) figure should be growing no faster than the Revenue line.  Ideally, your company will be meeting increasing demand by supplying products at the same cost as before.  In fact, best of all, if your company can cut the cost of goods sold during periods of rapid growth.  It indicates that the business can get its materials or provide its services cheaper in higher volume.  Where cost of goods sold rose outpacing sales growth, a red light just blinked from the income statement.


3.  Gross margin above 40%


We prefer to invest in companies with extraordinarily high gross margin - again, calculated by (a) subtracting cost of goods sold (cost of sales) from total sales, to get gross profit, then (b) dividing gross profit by total sales.

A gross margin above 40% indicates that there is only moderate material expense to the business.  It is a "light" business.  We like that.

Not all businesses are this light, of course.  Many manufacturing companies have a hard time hitting this target, as do many retailers.  Does that mean you should never invest in them?  No.  Does it mean you should have a slight bias against them in favour of higher-margin companies, all other things being equal?  Yes.

4.  Research and Development costs on the rise

Yes, we actually want our companies to spend more and more on research every year, particularly those in high technology and pharmaceuticals.  This is the biggest investment in the future that a company can make.  And the main reason businesses spend less on R&D one year than the last is that they need the money elsewhere.  Not a desirable situation to be in.  Look for R&D costs rising.  Of course, though, not all companies spend much on R&D.  A kiss is still a kiss, a Coke is still a Coke.

Generally, the best way to go about measuring R&D is as a percentage of sales.  You just divided R&D by revenue.  You want to see this figure trend upward, or at least hold steady.

5.  A 34% plus tax rate


Make sure that the business is paying the full rate to the government (Uncle Sam).  Due to previous earnings losses, some companies can carry forward up to a few years of tax credits.  While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth.  If companies are paying less than 34% per year in taxes, you should tax their income at that rate, to see through to the real growth.

6.  Net profit margin above 7% and rising.

How much money is your company making for every dollar of sales?  The profit margin - net income dividend by sales - tells you what real merit there is to the business.

We prefer businesses with more than $5 billion in sales to run a profit margin above 7 percent, and those with less than $5 billion to sport a profit margin of above 10 percent.  Why go through all the work of running a business if out of it you can't derive substantial profits for your shareholders?

Another way of thinking about this is that in a capitalistic world, high margins - highly profitable businesses - lure competition.  Others will move in and attempt to undercut a company's prices.  So companies that can post high margins are winning; competition is failing to undercut them.  As with gross profits above, some industries do not lend themselves to a high profit margin.   For example, a certain company is unlikely to ever show high profits, but it remains a wonderful company.


What you want to see on the cash flow statement?

Net cash provided by (used in) operating activities is positive or negative.

If a company is cash flow negative, it means that these guys are burning capital to keep their business going.  This is excusable over short periods of time, but by the time companies make it into the public marketplace, they should be generating profits off their business.

If a company you are studying is cash flow negative, it's critical that you know why that's occurring.

• Perhaps it has to ramp up  inventories for the quarter, or had a short, not-to-be-repeated struggle with receivables.  
• Some companies are best off burning capital for a short-term period, while they ramp up for huge business success in the future.  
• But if the only reason you can find is that their business isn't successful and doesn't look to be gaining momentum, you should steer clear of that investment.

Summary

You now have a fine checklist of things to look for (and hope for) on the balance sheet, income statement, and statement of cash flows.  Few companies are ideal enough to conform to our every wish.

The best businesses show financial statements strengthening from one quarter to the next.

For smaller companies with great promise and for larger companies hitting a single bad bump in the road, shortcomings in the financial statements can be explained away for a brief period.

But when you do accept these explanations, be sure you're getting the facts.  You want to thoroughly understand why there has been a slipup and do your best to assess whether or not it's quickly remediable.

We have, up to until now,  merely outlined the ideal characteristics, without ever putting a price tag on them.  Make sure you've mastered these basic concepts before fishing for some companies.

Click here to read a summary:

https://myinvestingnotes.blogspot.com/2025/12/finding-great-companies-what-you-want.html

Do you want to take your knowledge of investing to the next level?

Learning to invest can be an enjoyable pastime for those inclined toward it.  It is not a mystery that has to be left to the professionals.  Do you want to take your knowledge of investing to the next level?

You can do it as successful investing relies primarily on the proper understanding of basic mathematics and basic principles of business.

You want to learn about business.  

You want to learn how to value individual stocks.

You want to determine whether or not to buy more of the stock of your employer.

You want to own the greatest companies on the planet, hold them for decades, and turn a couple of thousand dollars into a couple of million dollars by the time you retire, or your kids retire, or their kids.

To get there, you need only add 6 + 17 successfully (23).  You need only multiply 12 X 2.6 (31.2).  You need only divide 178 by 14 (12.7).

Mostly, you'll just need to keep your eyes and mind open.  

The future of your financial situation rests more on these abilities than on working triple overtime next month or inheriting a whole mess of money from your great-uncle.


So, let's ask again:  is it time for you to step beyond the index fund and start investing in individual stocks?

Why invest in individual stocks?  

Because if you're methodical, you may beat the index funds that beat the majority of managed funds.  

Chances are you won't make much money at all in your first year of investing.

You'll still be learning and you'll probably make plenty of mistakes.

And there certainly are other alternatives to common stock.  Index funds are a great way to begin investing.

With method and resolve, private investors can manage to outperform the market over the long term.

There is no one way to pick stocks. Every stock strategy is a 'best guess' of how to invest.

Stock Picking 101

The Marketer's Manifesto

It’s time for fund managers to “return to their natural stock-picking tendencies,” said Citigroup chief global equity strategist Robert Buckland. “Just when the bear market (and subsequent rebound) has bullied us all into being very macro is the time when a good contrarian should be moving micro.” Over the last few years, the financial advisory business has been playing it close to the vest to protect as much of their clients’ investments as possible. They’re hesitant to move away from safe options because everyone is fearful of market fluctuations these days. However, some analysts say it’s precisely this strategy that’s holding us back. Stock picking is slowly but surely coming back into favor again, offering higher yields and better deals for people who know when to get in and when to get out.

Investors who are interested in stock picking have many different places to learn financial secrets, tips and trends. According to Forbes Magazine, some of these personal financial advisor “hot spots” include

ClearStation (www.clearstation.etrade.com), 
MSN Money (www.moneycentral.com/investor), 
Marketocracy (www.marketocracy.com), 
Reuters Investor (www.reuters.com/investing), 
MarketHistory (www.markethistory.com), 
Morningstar (www.morningstar.com), 
Sector Updates (www.sectorupdates.com), 
Stock Fetcher (www.stockfetcher.com), 
Stock Selector (www.stockselector.com), 
ValuEngine (www.valuengine.com) and 
Wall Street Transcript (www.twst.com). 

Over time, the consumers who watch market activity will begin to develop a fundamental understanding of the markets.

There are many different types of stock picking strategies. Some of the most common include

Fundamental Analysis, 
Qualitative Analysis, 
Value Investing, 
Growth Investing, 
GARP Investing, 
Income Investing, 
CAN SLIM, 
 Dogs of the Dow and 
Technical Analysis.

While there is limited space to delve deeply into these complex strategies here, more information can be found at Investopedia (www.investopedia.com/university/stockpicking/stockpicking1.asp). Even when consumers learn financial investment techniques, there is no guarantee, however. According to Investopedia: “The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory; a ‘best guess’ of how to invest.”

Stock picking can be done by individuals or by professionals. Top financial advisors work to assist clients in selecting a winning stock portfolio. While these individuals are undoubtedly more experienced in watching economic market fluctuations, they are still human and ultimately fallible. One should not simply entrust an enormous sum of money with a financial advisor, without looking over the periodic statements and watching the DOW/NASDAQ activity. All investing is a gamble, so expectations should be clear when getting started. Perhaps the best advice is still “don’t put all of your eggs in one basket!”

Beth Kaminski is the co-author of Curing Your Anxiety And Panic Attacks which detailed anxiety or panic attacks as well as tips on the various anxiety attack medication available at anxietydisordercure.com.


http://www.supermoneymaking.info/home-business-ideas/stock-picking-101-2/4787

How to pick the best stocks to invest

How to pick the best stocks to invest in Part 1 of 2

It takes the best stock market predictions to achieve top stock market results, but choosing the best stocks to invest in is not easy. One approach professional investors and traders use is the fundamental analysis of stocks, where others prefer the technical analysis of stock market trend.

The fundamental analysis of stocks is based on criteria like Earnings per share, Price/Earnings ratio, PEG Ratio, Return on equity and Return on assets.

Whether you are looking for the best penny stocks to buy or any other hot stocks to trade, you will find the following five out 10 fundamental key metrics very useful. They pinpoint the characteristics shared by the top performing stocks before they made huge trading profits in short term.

1. Earnings per share - EPS
Definition:
EPS is the ratio of the company's net income to its number of outstanding shares (all stocks held by investors and the company's insiders).
What it measures:
Earnings-per-share (EPS) serves as an indicator of a company's profitability.
Recommended value:
No less than 80.
Interpretation:
If a company has displayed good growth over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.
Observation:
There are many ways to define "earnings" and "shares outstanding". That led to different type of EPS.

2. Price/Earnings Ratio - P/E Ratio
Definition:
Ratio of a company' share price to its earnings per share.
What it measures:
How much investors are willing to pay per dollar of earnings.
Recommended value:
The best stocks to invest in usually have higher P/E compared to the market or industry average.
Interpretation:
If a company has displayed good growth over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.
Observation:
There are different types of P/E but the most used is the trailing P/E calculated with the EPS from last four quarters.

3. Price/Earnings To Growth ratio - PEG Ratio
Definition:
PEG Ratio is the price/earnings(P/E) ratio divided by the projected year-over-year earnings growth rate.
What it measures:
How cheap the stock is.
Recommended value:
Less than one (PEG < 1)
Interpretation:
The value of PEG ratio
-below one is an indication of possibly undervalued stock.
-equals one suggests the market is pricing the stock to fully reflect the stock's EPS growth.
-above one means the stock is possibly overvalued or the stock market expects future EPS growth to be greater than what is currently in the street consensus number.
Observation:
PEG ratio cannot be used in isolation.

4. Return on equity - ROE
Definition:
It is the ratio of the company’s 12 month net income to its shareholder equity (book value).
What it measures:
How profitable the company is.
Recommended value:
No Less than one 15%.
Interpretation:
High debt companies have higher return-on-equities(ROEs) than low debt companies.
Observation:
Relying on ROE has a downside. You will end up overweighting your portfolio with high-debt stocks if you go by return-on-equity(ROE) alone.

5. Return on assets - ROA
Definition:
It's the net income divided by total assets.
What it measures:
How profitable the company is in relation to its total assets.
Recommended value:
Return on assets above 20% and higher is better. Avoid company with Return on assets below 5%.
Interpretation:
The lower the debt, the higher the Return on assets. A rising Return on Assets usually foretells a rising stock price.
Observation:
The assets of the company are comprised of both debt and equity. The ROA is some time called ROI.

In Part 2, we will look at the stocks fundamentals like Relative price strength, Cash Flow, Financial leverage ratio, Consencus-earnings-forecast

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How to pick the best stocks to buy Part 2 of 2

As noted in Part 1 of this two-part article, successful online stock investing is about picking the best stocks to buy. Some professional investors and traders use the fundamental analysis of stocks, other rely on technical analysis of the financial markets.

The fundamental analysis of stocks is based on criteria like Relative price strength, Cash Flow, Financial leverage ratio, Consencus-earnings-forecast.

Whether you are looking for best penny stocks to buy or any other hot stocks to trade, you will find very useful the following 5 out 10 most important fundamental factors shared by the top performing stocks before they made huge stock market profits in short term.

1. Relative Price Strength - RPS
Definition:
Relative price strength( RPS) is the ratio of the price performance of a stock by the price performance of an appropriate index for the same time period.
What it measures:
How stocks have performed compared to the overall market over a particular period.
Recommended value:
Relative price strength(RPS) with a value of at least 70.
Interpretation:
Stocks with relative strength above 70 tend to continue to outperform other stocks.
Observation:
Avoid stocks with 12 month relative strength below 50 or stocks which three-month relative price strength drops 20% from its 12-month relative strength.

2. Cash Flow
Definition:
Amount of money that move into or out of, a company’s bank accounts during the reporting period.
What it measures:
How viable is the company in short-term? What is its ability to pay bills.
Recommended value:
Any positive number is OK, but it’s best if the operating cash flow (i.e.: cash flow attributable to the company’s main business) exceeds the net income for the same period.
Interpretation:
Stock of companies with more cash flow has greater chance to rise more.
Observation:
Stock's price of companies with little cash to support their operations is likely to stagnate or fall.

3. Financial Leverage Ratio - F/L Ratio
Definition:
Financial leverage ratio = total assets divided by shareholders equity.
What it measures:
Level of Company’s debt. Is the company submerged in debt?
Recommended value:
F/L of one means no debt. F/L less than five( 5).
Interpretation:
The higher the F/L ratio, the more the debt.
Observation:
Avoid companies with leverage ratios above 5 which the average of S&P500 index. P.S: Banks and other financial organizations always carry high debt compared to firms in other industry.

4. Consensus Earnings Forecast - CEF
Definition:
Consensus earnings forecast is the average of analysts’ forecasts.
What it measures:
Consensus about the earnings estimated by analysts.
Recommended value:
Avoid stocks where the latest fiscal-year estimates are more than two cents below the 90-days-ago figures.
Interpretation:
The higher the F/L ratio, the more the debt.
Observation:
CEF changes move stock prices. So negative forecast trend warns of future forecast reduction, which will likely pressure the share price.

5. Institutional Ownership
Definition:
Institutional ownership is the percentage of share held by mutual funds, pension plans, banks, and other big holders. Institutional ownership for in-favor of the best stocks to buy is usually between 30% to 60% of shares outstanding, and rarely below 30%.
What it measures:
How many shares are owned by institutions.
Recommended value:
Choose stocks with more than 30% institutional ownership.
Interpretation:
A stock with small % held by institutions is out of favor with investment professionals. That means they don't see the potential of profit. Do not try to outguess the investment experts.
Observation:
Avoid stocks with less than 30% institutional ownership.

These fundamentals indicators should be used in addition to the five other metrics mentioned in the article How to pick the best stocks to invest in part 1 of 2.

http://www.stockonrise.com/stock-trading-information/53-world-stock-exchange/143-how-to-pick-the-best-stocks-to-invest-in-part-1-of-2.html

http://www.stockonrise.com/stock-trading-information/53-world-stock-exchange/145-how-to-pick-the-best-stocks-to-buy-part-2-of-2.html