Key metrics for investment decision in the stock market

  • Comparative analysis of quoted firms in Q1 2021 earnings

Investment decisions in the stock market requires the use of financial ratios to evaluate short- and long-term prospects embedded in a stock. Particularly at a season like this when listed companies are releasing their Q1 2021 results, it is a necessity for investors to evaluate the performances of companies in their portfolio and compare with other similar businesses in the industry. Ratios measure the relationship between two or more components of financial statements. Every key ratios are always rated by comparing the current year with the previous year.

TURNOVER/ REVENUE/ TOP LINE

This is the total value of business that a company might have done within the period being evaluated. Turnover growth will tell you if the company is increasing its market share of its industry or not; and at what rate. So to invest well, look for companies that are always growing the turnover or topline. If you are able to lay hold on their strategy, that is what kind of businesses and what is it that they do that keep leading to the turnover growth, the better for you.

PROFIT AFTER TAX/ BOTTOM LINE

It is not enough for a company to be growing its turnover. Of what use is turnover growth when the whole money is been spent. Profit after tax is what is left after the deductions of all the expenses incurred in the process of running the business. This also includes tax to the government. Companies with profit after tax growth year after year is by far better. Why? A company can only reward investors well enough from profit after tax.

PROFIT MARGIN

This is the relationship between turnover and profit after tax. It shows and tells of management’s ability to manage resources well. It is expressed as percentage by dividing profit after tax by turnover, multiplied by 100. Profit margin tells of company whose management is frivolous with spending and companies whose management is good at managing resources. Do you need to be told the kind of management, you should invest in? Of course, the one who manages resources well. You might need to do some arithmetic to achieve this.    

EARNINGS PER SHARE (EPS)

This is the relationship between the profit after tax of a company and the number of shares in issue of the same company. In other words, when a company releases its profit for a year or quarter, if the whole profit is to be shared among investors in the company, how much will the fellow that has just one share in the company be getting.

PRICE TO EARNINGS RATIO (P.E RATIO)

This is the relationship that exist between the current price of a company and its earnings per share it has just released. If the price of a company has risen so well, the earnings must also of necessity rise, otherwise the P.E ratio will increase. This can also tell of how many years it will take you to retrieve your investment at current price and earnings.

EARNINGS YIELD

This is the percentage of price of a stock that the current earnings is. You get this by dividing the earnings per share (EPS) by the current price of the stock, multiplied by 100. The higher, the better.

To invest well, consider the following:

  • Look for companies where at least these basic ratios are positive.
  • Look for the consistencies in these ratios over years and from quarter to quarter.
  • Compare these ratios from one company to another either within the same industry as listed on floor of the Nigerian Stock Exchange or the market generally.
  • Never attempt to invest in companies without regular results released to the stock exchange. It will be like you sending your children to school and they don’t bring result to you; yet you keep paying their school fees; if you do that you will not be a responsible parent.
  • If you go to invest in companies without regular results to the market such that you can see, rate them and analyse them; then you might not be called a responsible investor.

Q1 EARNINGS OF QUOTED FIRMS IN 2021

PROFIT MARGIN

Leave a Reply

Your email address will not be published.

WP Twitter Auto Publish Powered By : XYZScripts.com