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10 Fundamental Metrics How to Choose the Best Stocks Part 1

10 Fundamental Metrics How to Choose the Best Stocks Part 1

Have you ever wondered how you can choose the best stocks to invest in?

Do you happen to be an accountant, a banker, statistician, or simply a person knowledgeable of how important numbers are at work?

Or are you simply a professional, student or beginner wanting to do-it-yourself?

Imagine your broker calling you up saying “EPS has now been adjusted 4 times last year’s forecast due to 67% increase in net earnings by the company. ROA is now standing at…” What the?

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In MoneySense July-August 2011 Issue, “How to pick the best stocks to invest in” by Christian Bayonne, he mentioned 10 metrics which investors and traders can use to assess the potential of a stock.

I have added further research to the list from sources around the web.

Please note that while the below metrics offer good source of numerical understanding about the stock or company, these are not the only metrics we can use. Some trade via rumor, news, or gossip. Some rely on mechanical advice or technical charts. Here, we give you a fundamental way of sorting out your stocks through the use of these metrics (some are easily available) in your online stockbrokerage’s research centers.

Here are the 10 DIY metrics for your research. (This is part 1 of the post series):


  • Earnings Per Share (EPS)

Definition:

Ratio of the company’s profit or income to its oustanding shares.

Calculation:

http://www.investopedia.com

Interpretation:

EPS has been used to measure the price of the stock.

Recommended value is no less than 80.

For me, I would interpret this as how much the company stock is really worth relative to its capacity to profit.

According to Investopedia (read source here), it is important to note that while there can be two companies with the same EPS, they can differ according to how capital intensive the company is, and how fast it can use assets or equity to profit.

  • Price/Earnings Ratio (PE Ratio)

Definition:

Ratio of stock price to its EPS.

Calculation:

 Earnings per Share (EPS)

Interpretation:

Here we measure how much an investor is willing to pay per earning of the company.

According to Investopedia (read source here), to make this metric sense one should compare this to an index or benchmark, or to a competitor company of the same industry. And since earnings are subject to manipulation, it is not suggested that investors look at one metric alone.


  • Price/Earnings to Growth Ratio (PEG)

Definition:

P/E ratio over the year over year earnings growth rate.

Calculation:


http://www.investopedia.com
Interpretation:

If below 1, it indicates that the stock is undervalued.

If equals 1, it can be that the market is pricing the stock just right.

If more than 1, stock may be overvalued.


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  • Return on Equity (ROE)

Definition:

12-month net income of company over equity

Calculation:


Return on Equity = Net Income/Shareholder’s Equity

Interpretation:

This metric measures the profitability of the company relative to its equity.

Recommended value for this metric is no less than 15%.

Be careful not to overweigh your portfolio with high-debt companies with high ROE.

  • Return on Assets (ROA)

Definition:

12-month net income of company over total assets

Calculation:


Return on Assets = Net Income/Total Assets

Interpretation:

This metric measures the profitability of the company relative to its assets.

Recommended value for this metric is above 20%. If below 5%, avoid.

Sometimes this stock is called ROI or Return on Investment.

Please continue reading for the Part 2 here.


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