Selecting Stocks: Three Important Criteria to Consider

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Selecting Stocks: Three Important Criteria to Consider

You’ve worked long and hard to earn your money. Now, maybe you want to start investing that money in an effort to gradually build wealth for yourself and your loved ones. While investing in stocks and/or experimenting with Forex trading can be an excellent method of securing a prosperous future, it’s vital to select the right stocks for you. If you don’t do your research and pick stocks that align with your financial goals, your money won’t work for you the way you need it to.

Here are three essential criteria to consider when choosing your stocks.

1.PE Ratio

When researching stocks, the first thing you’ll want to examine is the PE ratio, which is the market value price per share divided by the company’s earnings per share. This metric allows investors and analysts to assess whether a company’s stock price is overvalued or undervalued. It helps investors determine what the market is willing to pay today for a stock based on that company’s past or future earnings.

As a general rule, the lower the PE ratio, the better. A higher PE ratio means that you are paying more upfront to buy a share of the company’s earnings and that the stocks are possibly overvalued. Keep in mind that there are nuances to this principle, so be sure to conduct thorough research on the industry benchmarks for the stocks you’re exploring.

The standard P/E ratio stands at approximately 20-25, meaning a higher P/E ratio is not as beneficial to you in the immediate sense. A good P/E ratio for a stock would generally fall somewhere below the 20 mark, as it indicates healthy organizational earnings and undervalued stocks. Good P/E ratios for stocks typically fall somewhere below the 20 mark, whereas an average rate stands somewhere between 20 and 25.

Take eBay, for example, which topped its projected earnings per share and overall revenue estimates in its most recent quarter, and boasts a PE ratio of 9.0 as of July 6, 2020. This is an excellent PE ratio for new investors as it represents the corporation’s healthy organizational earnings.

2.Asset Utilization Ratio

Favorable asset utilization is the ratio of revenue earned for each dollar of assets that an organization owns. For instance, if a company’s asset utilization ratio is 30%, that means it is earning 30 cents for each dollar of assets it owns. This ratio is important to assess when choosing stocks because it typically indicates a company’s level of efficiency over time.

3.Free Cash Flow

Free cash flow (FCF) represents the cash produced by a company through its operations minus the cost of its expenditures. This means that free cash flow is the amount of cash a company has left over to reward its shareholders through dividends and shares buybacks. Free cash flow can act as an early indicator that earnings may increase in the future, particularly given that increasing cash flow typically precedes a spike in earnings. In other words, a high free cash flow could mean a big payoff for investors, which is why it’s an important criterion to examine when selecting your stocks.

There’s no denying that pinpointing winning stocks is an extremely tricky process. However, with these three criteria at the forefront of your research, you’ll be better equipped to select stocks that match your preferences and meet your long-term financial goals.