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How to use the income statement to uncover winning penny stocks

by , 21 September 2015

Finding the right penny stocks to buy isn't easy. But if you can uncover the best penny stocks on the stock market, you can look forward to ample profits in the years ahead.

So when it comes to looking through a company's accounts, what should you look at?

Let's see what you should look at in the income statement…

The income statements of penny stocks

As for all listed companies, the income statements of penny stocks reveals some key information:

  • Turnover;
  • Operating profit before interest and tax, interest pair or received tax paid;
  • Net taxed profits;
  • Extraordinary costs;
  • Attributable profit; and
  • Dividends.

A company will state these for the current financial year and at least the previous year, but they may detail more.

The key thing when looking for potential penny stocks to invest in is to find companies growing sustainably. And you want a company to do this in such a way that it creates value for its shareholders.

For instance, you want to see that its turnover is growing nicely. But you also want operating margins to remain consistent. If operating margins are under pressure, this suggests a company is cutting its prices.

To calculate the operating margin, you divide turnover by operating profit before interest and tax.

Looking at a penny stock’s earnings per share

One figure worth paying attention to is earnings per share (EPS). You want to see earnings growing over the years.

EPS is a company’s net profit after it’s paid all costs, such as interest and tax.

There is also headline earnings per share (HEPS), which is attributable profits before extraordinary costs on a per share basis.

HEPS excludes profits a company makes from selling an asset, so it’s worth paying attention to.

To consider researching a penny stocks further, you want to see:

  • Growing sales and turnover;
  • Consistent operating margins; and
  • Growth in EPS and HEPS.

So there you have it. How to use the income statement to uncover winning penny stocks.

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How to use the income statement to uncover winning penny stocks
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