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Follow these four steps to uncover the best shares to buy

by , 07 July 2015

Investing in shares isn't easy. After all, you want to buy the best shares out there that give you the best chance of profits.

When buying shares, you want to invest in the best quality companies out there.

So what should you check?

Read on to find out…

How to evaluate a company before investing

By doing these four things, you’ll be able to see whether a business is great, average or pretty poor. These four things can take a little bit of time to do, but it’s time well spent.

These techniques will allow you to hone in on the best shares to buy, Porter Stansberry in Daily Wealth explains…

Step #1: Profit margins
A good business will have high profit margins. High profit margins show a company is doing well in its industry and thriving against its competitors.

To look at how good a company’s profit margins are take its total cash flow from operating profits and divide this by a company’s total revenue. Multiply by 100 to get a percentage.

You want to see cash operating profit margins in excess of 20%.

Step #2: Check capital efficiency
This looks at how much a company needs in capital to maintain its facilities and see growth in its profits.

You can see whether a company gives more money back to its shareholders than it spends on its business. You’re looking for a company to give more back to its shareholders.

Compare a company’s capital investments with its spending on dividends and share buybacks. This should be greater than 1.

Step #3: Return on invested capital
To check this, just add all a company’s long-term debt and all its equity capital together. This gives you invested capital.

Compare this against a company’s net income. You’re looking for more than 20%.

Step #4: Return on net tangible assets
This is a great measure of a company’s quality.

Take a company’s net tangible assets and compare this to its net income. You’re also looking for a figure above 20%.

If you perform the above tests and find a company hitting all the right levels, it looks likely to be a great long-term investment.

So there you have it. Follow these four steps to uncover the best shares to buy.

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Follow these four steps to uncover the best shares to buy
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