Investment School: How to pick a stock?

How to pick a stock?

While choosing a stock, following criteria's need to be analysed for choosing the correct pick

ROCE(Return on Capital Employed)

ROCE = profit after tax + interest earned on investment in long term funds by the company

Higher the ROCE , better is the company.

ROE(Return on Equity)

ROE = Profit After Tax/Shareholder funds.

Higher the ROE, better.

Last 10 years sales growth

Compare the growth percentage with the industry average to figure out if the company is a underperformer or outperformer

Free Cash Flow:

Free Cash Flow = Operational profit - capital expenditure.

Higher the free cash flow, better is the company.

Debt/Equity Ratio

Debt/Equity Ratio = Debt used for business/equity capital used for business

Ratio of > 2 is risky.

Working Capital

Working capital = Cash needed to run daily business.

Higher (Sales/Working capital) is a good sign.

Profit Margins

Net profit Margin = Net Profit/Sales.

Higher margin, better prospect.

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