Picking The Right Stock
THE stock market gives the opportunity for ordinary investors to own shares of various listed companies. It also provides the possibility of wealth generation by outpacing inflation over time. According to the Philippine Stock Exchange, there are around 868,810 stock-market accounts. The number represents a just a small fraction of the total population in the Philippines. In this light, as more Filipinos become interested in stock-market investing, a discussion of tips on picking the right stocks can be valuable.
In picking the right stock, one must look at the company and its industry. The Boston Consulting Group developed a model called the growth-share matrix that classified companies according to their market growth and market share. A company whose market growth is low and has a low market share is called a dog. This is the most unattractive stock. Investors must avoid investing at all costs. A company whose market growth is low but has a high market share is called a cash cow. It would most likely have good and stable earnings and cash flows. It can be a good choice for investors as they milk benefits like dividends.
A company whose market growth is high but has a low market share is called a question mark. In this case, the investing decision is tricky since the earnings and cash flows are quite unpredictable. A company whose market growth is high and has a high market share is called a star. This is the most attractive stock. Investors must consider investing since the earnings and cash flows would most likely be high and growing.
In picking the right stock, one must look at the numbers of the company. One of the first things an investor can check is the pattern of sales growth. Historical sales growth can be a good indicator that a company has been able to sustain its loyal clients and has been able to reach out to new clients effectively. However, apart from sales, one should also look at the bottom line. A consistent or growing net income pattern would mean that the company is being managed well and has sustainable business operations.
It would be worthwhile for an investor to also check the profitability, liquidity, leverage and efficiency levels of a company to comprehensively assess its condition. Financial ratios of a company come in handy but they are best analyzed within the context of industry comparisons. Profitability is measured by comparing net income with items such as sales and assets. Positive profitability ratios reveal the ability of the company to manage costs and also make the most out of its assets in terms of financial returns.
Liquidity through the current ratio compares a company’s current assets with its current liabilities. A good current ratio means that a company has enough current resources to meet its short-term obligations. Leverage shows the dependence on debt by a company. A highly leveraged company can imply that it might have difficulty expanding in the future as creditors may want to avoid it. Efficiency means how well the company is able to use it resources. One efficiency measure is inventory days where the ability of a company to optimize inventory is tracked. Another measure is average collection period of receivables.
In picking the right stock, one must also look beyond the numbers of the company. The balanced scorecard proposes that aspects related to how the company deals with customers, how internal processes are executed and how organizational capacity is developed must be studied for holistic analysis.
Investing in the stock market can potentially lead to good gains in the future. A good balance of analysis in both quantitative and qualitative factors must be done. Evolving market conditions imply the need for continuous learning so that stock investing skills will improve over time. Hopefully, the right stocks will be chosen so that the returns on these stocks can help every Filipino be one step closer to financial freedom.
Gemmy Lontoc is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 73rd RFP program this November 2018.
To inquire, e-mail firstname.lastname@example.org or text <name><e-mail> <RFP> at 0917-9689774.
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