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
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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