The world of investing can be overwhelming, with so much information out there on the internet and social media, it can become even more confusing and daunting as to where to put your money or whom to turn to for advice. As a beginner myself in the field (and I’m sure there’s a lot of you out there as well), I came to the understanding that **doing my homework** is a very important aspect of it all. To clarify, doing my homework is basically doing my own research, developing findings and analysis about the companies to choose the best possible investment in the markets and ultimately optimizing your *ROI*.
Why I chose **doing my homework** as the number one thing on my checklist to turn to every time I invest is because when you do your own research (DYOR) and due diligence, not only do you gain knowledge and grow your understanding of markets, but also your decisions are based on factual and objective analysis, stripped of any emotional bias or rumors, which can affect your portfolios in negatively.
Here’s are five factors to look for in a company before you decide to invest your money:
1. Check Earnings Growth YoY
Look for net income that a company has year over year, ask yourself does the earnings growth generally increase? Even if the increase isn’t dramatic, a company that shows steady growth and consistency in earnings over time can be a good indicator for the future.
2. Compare Debt-to-Equity Ratio
Debt-to-Equity basically measures how well the company manages its total debt. To get the ratio, you divide the company’s total debt to the total equity shareholders have in the company. As an Example: if a company has EGP 10 million in total debt and the total equity of all the shareholders is EGP 20 million, it would have a 1:2 debt-to-equity ratio.
What this means is that the company is over-leveraged and that can limit the company’s choices in making business decisions, A good rule of thumb is 2:1 or less ratio meaning the lower the debt ratio, the more a company can take risks without the worry of defaulting on its large debt.
3. Analyze Price-to-Earnings (P/E) Ratio
Price-to-Earnings is a key indicator of whether a company’s stock is currently overvalued or undervalued, to get the P/E ratio compare the current stock price to the annual earnings-per-share (EPS).
First to calculate the EPS, divide the net profit by total outstanding shares, as an example: a company wit a net profit of 4 million EGP and 10 million outstanding shares of stock has an EPS of 0.40 EGP per share.
To calculate the P/E ratio, take 10 EGP stock price, and divide by EPS 0.40 per share and you’ll get a P/E ratio of 25.
What this means is a higher P/E ratio in comparison to companies in the same industry may be a sign that the company is currently overvalued and vice versa.
4. Dividends
If you don’t have the time to watch the market and search for financial indices which I don’t usually recommend, then it would be better to look for dividends, Dividends are distributions made by the company to its shareholders as a reward for its profits, Now the majority of Egyptian companies do provide dividends, in this case it would be recommended to observe the dividends payout ratio issued, which shows how much of a company’s earnings after tax are paid to shareholders.
To Calculate the dividend payout ratio, divide the dividends paid by the company over the net income.
what this means is: how much a company is returning to shareholders versus how much it is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings), or in other words how much money the company kept for itself.
5. Other Aspects I like to know about
Now that we’ve talked about the company financials and some ratios to help us decide without the use of emotions, it’s time to consider other things before you invest, and that part here is something that I personally like to do, as it assists me in growing my knowledge every single day, So here we go:
– Management: I like to find out about the company’s management team often, understand their history of experience and their track record, search their presence on the social media and keep an eye out on any news or press releases on the company.
– Company’s Business Model: I like to search a company’s business model, learn more about its products and services, target markets, and the industry they’re competing in and their customers.
– Portfolio Mix: I like to keep watch on my portfolio mix of different investing vehicles, and diversification is key to any long-term investing strategy, to balance and expand my risk exposure.
On this last note, I’d like to leave my readers with a simple investing rule that I always falls back to whenever I experience doubt or stress, which is “Go back to Basics”.
1. Set your Financial Goals
2. Calculate your risk
3. Aim to invest long-term
4. And don’t forget, DYOR!.
