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How do you evaluate a stock - Essay Example

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However, identifying the stock that is most appropriate for investing is a challenging task. Stock investments evaluation is influenced by four critical factors. The factors are; price to book ratio (P/B), price to earnings…
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How do you evaluate a stock
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Download file to see previous pages The P/E ratios are compared only in organizations within the same market or industry. The price to sales ratio (PSR) should be near one. It is computed through dividing market capitalization by revenue of the most recent trading period. It is most suitable for analyzing stocks in the same sector.
The Return on Equity (ROE) illustrates the returns for shareholder’s equity. It should appropriately be more than 10%. The ratio illustrated the effectiveness of the company in generating profit per equity unit. The earnings growth should be a minimum of 10% higher than the previous year. This trend should be illustrated in several years. The higher the growth, the more investments returns.
The debt to asset ratio illustrates that debts should be equal to or less than 50% of the assets. This ensures appropriate levels of leverage across several companies. The greater the ratio, the leverage degree is higher hence results to financial risks.
The returns on assets for Wal-Mart and Costco in the trading period ended 2014 are; 7.86% and 6.50% respectively. The performance of Wal-Mart is thus higher due to the greater returns on assets. The returns on equity for Wal-Mart in 2014 are 21%, and that for Costco in the same period is 17.79%, thus Wal-Mart illustrates the most appropriate value.
Risk identification is very important in ensuring higher investment returns. The investors and fund managers usually quantify the forecasted losses of the stock investments and then adopt appropriate actions in relation to risk tolerance and also investment approaches. The risk assessment involves the study of several factors in relation to growth, profitability, low valuation, and the fiscal strength. A stock possessing all the illustrated characteristics is the most appropriate for investments (Horcher 3).
The risk management techniques ensure successful stock trading. The trading profits can be safeguarded through simple strategies like; trade planning, take-profit points, ...Download file to see next pagesRead More
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