Lots of transactions happen daily at the stock market. People have also been buying stocks over the years perhaps due to its profitability.
There different ways through which anybody could multiply his or income, but the issue with investing in stocks is that you need a reasonable amount of money especially these days that almost every economy is inflated.
Studies over time have shown that money invested in the stock market will grow at an average of 7% a year.
Obviously, there would be ups and downs in the stock market but in the long run you will have a nice return.
The simple truth is that if you are disciplined enough to invest 10% of your income starting when you are young, you will end up millionaire.
By the time you clock 65 you retire a millionaire. It might be worthless than it seems like now but you will be able to retire comfortably.
Like a friend would always say, “if you don’t invest in the stock market most other things like savings accounts will likely grow at a lower rate than inflation so the value of the money you save will actually go down over time.”
However, knowing the in and out of the company where you intend to invest is very important.
Here are the key things you need to consider before you invest according to Rohit Jain, Founder of Investello.com
Free Cash Flow: Does the company have a free cash flow? Free Cash Flow is simply the Cash Flow from Operations minus the capital expenditures.
FCF is the money left over from cash generated from operations after reinvesting whatever is required to keep the business going.
So FCF is the money that can be extracted from the company without an impact on the business’s operations. A company which has had a positive and growing free cash flow can be a great business.
Return on Equity and Net Profit Margin: A high RoE and NPM ratio denotes that the company is doing well. You should look for the companies that have a return on equity greater than 20%.
An increasing Return on Equity and Net Profit Margin over the years denotes that the company has increased its profitability. This can be due to increased competitiveness and efficiency.
Historical Profit, Revenue and Dividend Growth: Though the past growth in profits can`t be a promise for future growth, it is still important to look at the past performance to ensure that the business has passed the test of time.
A company showing a steady growth can be doing so because of a competitive advantage, which is also known as Economic Moat.
Debt Equity Ratio: Debt is a dangerous thing to have on your balance sheet, unless you are able to gain more cash flow with that debt and eventually repay it.
You should always explore the reason a company raised a debt and what it is doing with that money. A decreasing debt is a good sign. No Debt is an excellent sign.
Pledged Shares: Stay away from the companies which have pledged shares of more than 10%. This is a sitting time bomb.
Usually this is the last resort of raising money by the promoters, and if the promoters default on payments, the institution holding those shares may sell them in open market and the price can crash in no time.
Income vs Operating Cash Flow: If there is a huge decrease in operating cash flow, while net income is still increasing, it can denote the possibility of accounting manipulation. Stay away from such companies.
