February 08, 2021   by

Key Takeaways for selection of stock

  • Cash flow per share and earnings per share
  • Volume
  • Beta
  • Conservative Capital Interest
  • Open Interest
  • Asset utilization
A volume analysis chart

From the previous article, it is evident that the stock market is one of the best financial vehicles for a Chama. Stock investment is one of the best ventures if utilized properly. In the 21st century, technology advancement has created different ways to make investments, and venturing into the stock market expands one’s horizons. However, investing in these markets requires due diligence and research. For stock investors, deciding on the best investment is often a challenge. They, therefore, have to review the massive amount of data that is available on public companies. This process is vital for the quality assessment of companies and in determining whether they are suitable for their portfolios. The process is sometimes arduous and tiresome.

During the evaluation of bonds, the overriding consideration is credit quality. When it comes to stocks, there is no silver bullet, therefore individual investors who are interested in purchasing equities are faced with a tougher task. Some of the tasks they are required to complete include performing due diligence and the evaluation of their recommendations from financial advisors. The development of a simple set of criteria that one may follow when evaluating stocks and makes the tasks less stressful.

Cash Flow per Share and Earnings Per Share

An image analyzing stocks with a laptop

The cash flow per share is a measure that helps in breaking down a company’s revenue. It has grown increasingly popular by the day. Accounting can hinder earnings and make them seem more favorable, but cash is often hard to manipulate. It is also easy to trace how effective its operations are. This statistic is crucial when determining if there is enough cash to pay off debts and engage in future endeavors that contribute to an increase in stock prices.

The second is EPS, which represents the earnings per share. It is calculated by subtracting the dividends on the preferred stock from the net income and then dividing the output by the average number of shares outstanding. The EPS is helpful when breaking down the profit or earnings of a company in terms of individual shares. When looking for a company, investors should look for positive earnings as well as consecutive growth over each quarter.

The company should meet the earnings predicted by the business analyst. If not, it instantly decreases the stock price when the actual earnings are announced. It is important to note that EPS has one near-fatal demerit, which is that if a company’s accounting department can manipulate it with ease. However, despite this, it should still carry some weight in choosing a stock. Investors should look for a company that has both the cash flow per share and earnings per share.


A volume analysis chart

One of these criteria involves evaluating volume. Volume refers to the amount of stock purchased and sold in a single day of trading. It is important to ensure that the volume of tasks is over 500000 approximately. This is because if the volume is low, then the liquidity is similarly low. The low liquidity makes it difficult to buy or sell, as there are very few buyers and sellers and thus the stock moves in a choppy fashion. This creates a lot of unnecessary volatility, and this is one of the main things a trader should avoid. This is the type of unfortunate scenario one encounters when they trade with penny stocks.


An image showing the volatility of stock

Thirdly, there is Beta. This is an indicator of a stock’s standard deviation or volatility. This is at times difficult to calculate, however, many online tools help. The calculation involves using the standard deviation of the monthly returns of the specific stock performance of the largest companies listed on the stock exchange market monthly returns for approximately 5 years within the same horizon and then inserting the two standard deviations separately into one overall variance formula and dividing it by the population variance.

Although calculating beta may seem difficult, using it is much easier. For instance, if a stock has a beta of 1.0 it moves in congruence with the market. This can be interpreted as a one percent increase in stock daily, the stock performance of largest companies listed on the stock exchange market increases in 1% a day. Contrariwise if the market goes down then the stock will decrease by 1% and the market value of large companies in the stock value goes down to 1% as well. If the beta is 2.0 then the market increases by 3% therefore the stock will increase to 6%. However, if the stock drops to 3% then the stock falls to 6%. If the Beta is negative, then it moves opposite to the market, or in other terms, it moves inversely. This incident rarely happens though.

Generally, a company that is reputable, financially stable, and long-established within its sector, has the lowest beta. These large blue-chip companies are also easily backdated and one can view their volatility records. On the other hand, investments such as casinos have the highest betas. In theory, when investing, one can make quick and significant gains when investing in high beta stock, however, one could also lose the most if the market underperforms. If one is willing to take high risk for tremendous investment, then the best way would be to invest in companies with high beta, however, if they prefer to take a low risk, then large blue-chip companies are the best as they have very little volatility.

Conservative Capital Structure

Capital structure refers to how a company funds its operations by using equity and debt. A conservative capital structure means that a company characteristically marshals capital in ways that create sufficient short term liquidity to cover operation costs, while also reserving enough finance expansion without increasing long term debt significantly.

Open interest

Plenty of stocks offer options contracts for purchasing and selling for future purposes. As an investor one is not required to understand the options to fully maximize the advantages of this opportunity. There are different ways of performing research on a potential financial opportunity. One way is through financial websites where they offer a link for option chains. These are the options available for stock. These websites are very helpful when learning about options. The stocks that have more open interest on the call side are more likely to be more profitable than those that don’t. This is because it shows that more people would like to purchase the stocks and sell them in the future. It is important to look for a second opinion when purchasing a stock.

Asset Utilization

Favorable asset utilization refers to the ratio of revenue earned for each dollar of asset a company owns. For instance, if a company’s asset utilization has a ratio of 40% then its earnings are 40 cents for every dollar owned by it. Ratios differ and are favorable depending on the industries. Similar to operating margins, the asset utilization ratio is a way to measure efficiency over time.

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