The previous article on this topic, speaks about the strategy and considerations while picking an individual stock on eToro. This article gets into the metrics that need to be looked into during this process.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
There are several parameters that can be looked at, but here are the five most important ones. You can have a look at them on eToro by navigating to your desired stock and selecting the ‘Stats’ tab.
The Price-Earning (PE) Ratio measures the market value of a stock with regards to the income of the company (See 1 in the image above). P/E says something about the value of a stock. The PE ratio is calculated by dividing the selling price of a stock by the income of the organisation, normalised per share. This metric is often used to be helpful to co-relate organisations in the same industry or sector.
Earnings per share is a metric that describes the profitability of an organisation on a shareholder level, No. 2 in the image above. It is the ratio of the adjusted income of the company (net income minus the preferred dividends) to the outstanding shares. Preferred dividends are the dividends that are reserved for selected stakeholders, i.e. not distributed to common stakeholders. Thereby, making EPS a scale according to which one can assess the income available to regular investors. This allows for the comparison of companies of various sizes, with one another.
You can find this metric at 3, in the image above. Usually, stable companies are the ones that pay dividends. An increased sign of stability is increased dividend payout year on year – companies that do this for decades are called dividend aristocrats. A word of caution, beware of companies that have an extremely high dividend yield – this often a sign of desperation. A high dividend could be a sign that the company prefers to share its profits over-investing in itself. Dividends are the first to get cut in very challenging economic periods, allowing the company some more access to money and fend off trying times. The dividend yield is a crucial consideration in long term investing.
The next two metrics are not directly available on eToro but can be derived from the company information in the Stats and the Research tabs.
Company History And Strength
The most important aspect of analysing a stock is to look at the industry that the stock forms part of. Ensure that the industry is steady and has potential for future growth. The next step is to assess the position of this stock within that industry – is the company doing well? Is the company competitive? Asking crucial questions like these can help ascertain if a company has an advantage. It is imperative that the study is equitable. To ensure that, compare companies of the same size (use the market cap metric). Usually, it helps to compare the performance of the companies over a fixed interval.
Almost every company on earth has a debt. This is not necessarily a bad thing, as long as companies have the assets and equity to back it up. It goes without saying that a company without any assets and a huge debt, could be expected to perform poorly financially. A metric that represents this is called the debt-equity ratio. It is the ratio of the sum of the liabilities to the sum of the amount of shareholder equity. In some cases, a debts to assets ratio is calculated – which is similar to the debt-equity ratio. It is good practice to look at these metrics industry-wide. The acceptable limits also vary per industry.
In the next part of this series, we will talk about how to analyse these metrics in-depth and apply them with active and passive investing. Now that you know what metrics to look at, feel free to try your hand at investing in them on the eToro Demo Practice Account.
This Article is Part of A Total guidance list on How to pick individual stocks, make sure you go by the article one by one to get a bigger understanding of the total picture. 😉
- How to Pick an individual stock Part 1 - The Strategy
- How to Pick an individual stock Part 2 - 5 metrics to look at when stock picking
- How to Pick an individual stock Part 3 - P/E Ratio (Price-Earnings ratio)
- How to Pick an individual stock Part 4 - Earnings Per Share
- How to Pick an individual stock Part 5 - Dividend Yield
- How to Pick an individual stock Part 6- Company History And Strength
- How to Pick an individual stock Part 7- Debt-Equity Ratio
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