Things To Look For:
- Look for companies with a consistent growth in earnings.
- Look for companies whose annual earnings in the last three years have significantly outpaced the market.
- A company whose earnings are growing faster than its competitors should also have a stock whose price should grow faster too.
- Well managed companies generally take a significant share of their earnings and reinvest them back into their business to fuel the company’s growth.
Example: A company earns $10 million. If it has 5 million shares outstanding then the EPS is $2.
$10mil (earnings) 5 mil (shares outstanding) = $2 EPS
Things to look for:
- How does the current EPS compare to the stocks historical performance?
- How does it compare to professional analyst expectations?
- Look for a company whose earnings "beat" analyst expectations.
- Are the profits from routine operations or are they from a one-time occurrence, such as sales of a division or assets? You should look for profits from routine operations.
- Look for a company whose EPS in the latest quarter is higher, preferably much higher than the same quarter a year ago.
For example: If a stock is selling at $20 and has an EPS (Earnings Per Share) of $2 in the previous 12 months, it has a "trailing" (looking back) P/E ratio of 10.
$20 (price per share) ÷ $2 (Earnings Per Share) = 10 P/E It is so important you generally can find a stock’s P/E ratio in newspapers and financial websites often next to the stock’s price.
Things to look for:
- How does the company's current P/E ratio compare to: Its historical P/E the P/E of other companies in the same industry; how does it compare to the market in general such as the Dow Jones or S&P 500.
- Investors usually are willing to pay more to own shares of a company whose earnings will out-pace its competition.
- Some people look for companies with low P/E ratio if they expect a company to prosper in the future, or if its industry is projected to experience growth. But make sure that you have good reason to expect the company to grow in the future. A low P/E ratio could just be a sign of a poorly performing company.
- Also look at "forward" P/Es based on analyst expectations, "Trailing P/E" only tell you what happened.
Example: If a stock is selling for $40 and pays $2 a year in profits its dividend yield is 5%.
Things to look for:
- Compare the dividend yield of a company to its competitors. Dividend comparison varies by industry.
- Has the company historically raised its dividends?
- Look for companies with rising dividends and rising earnings.
- If a company cuts its dividends this usually signals a problem.
Things to look for:
- Return on equity that grows year after year.
- Look for a company with a Return On Equity of 15% or higher. The higher the better.
- If the ROE is up and down, or just plain down, the company might have a problem with debt or profit margins.