By Chinwendu Obienyi
Individuals investing in stocks are always faced with a tough decision, which is, conducting due diligence on the companies or evaluating recommendations from professional advisors.
Stock metrics can be used to assess, compare and track the performance of stocks. While the metrics won’t mean that the stocks are 100 per cent safe and profitable, using the metrics helps to increase the chance of selecting stocks with great potential for profitability.
With the earning season drawing near from the Nigerian Exchange Limited (NGX) or across the globe, this is the best time for stock investors to position ahead in companies with a potential and corporate actions or get out of bad positions. These metrics are important considerations for investors who are keen on quality companies that are more likely to deliver impressive performances.
These metrics are recommended mostly for beginners and stock investing.
1. Consistent dividend payment
Dividend is a share of profits after tax that a company pays out to its shareholders. Dividends are like interest in a savings account paid regardless of the stock price. Investing in dividend-paying companies is a very popular strategy for many traditional investors, especially in Nigeria. To invest, you can select companies that have paid dividends at least three out of the last five years. This guarantees the periodic payout or per-share capital appreciation, which is the increase above your purchase price. The dividend yield or dividend-price ratio of a share is the dividend per share divided by the price per share. It is also a company’s total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. Many companies offer better dividend yields than treasury bills.
2. Revenue or sales growth
Companies with consistent annual growth in sales have greater potential for profitability. As a potential shareholder, it is important to monitor sales growth trajectory and review historical growth at least for three years. The company’s sales/revenue is the total quantity sold of its products/services multiplied by its average price. The faster the growth rate, the higher the likelihood that the stock will rise. This is why it is important to know the product that a company sells as this gives one an idea of potential demand and competition it faces. Also, it helps to understand how government policies affect the cost of production and profitability.
3. Consistent growth in profit
Profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs, including interest on borrowed funds. As a shareholder, you can only receive dividends if a company makes profit. It is only on rare occasions that a company pays out dividends out of the past or accumulated profit. This is why it is important to follow the news and confirm that the companies you have invested in or are about to invest in make profit. If a company makes a loss, you need to ascertain whether it is a one-off, if not, one can sell off his or her shares in that company as this will affect the company’s share price.
4. Strong leadership
A strong leadership is crucial to the success of a company and is more likely to deliver on the objective of strong growth in profit and sales. Thus, it is safe to invest in companies with a leadership team that has a good track record and a reputation for innovation. This plays a major role in investors’ decisions and it helps in minimizing µinvestment risk.
5. Release of positive news
Most times, the stock price of a company goes up when a company publishes positive news, which includes strong quarterly results, new products, announcement of dividends or bonuses and so on. In addition, stocks appreciate when the government releases a policy that would support and make businesses more profitable. This also means that negative news and policies could push the stock price downwards, hence, it is important to read up consistently when you invest in stocks.
Overall, investing in stocks requires a lot of time and patience and, if you are unwilling to be hands-on, you can invest in equity mutual funds where the fund manager takes over this responsibility. If your stock portfolio is substantial, you can also engage a Securities and Exchange Commission-registered asset management company to monitor your portfolio at an affordable price.