Figuring out what business venture to invest in can be a difficult process. When I was looking for a business to become a part of, I had a rough time trying to understand what to look for and what are some red flags. I have put together some metrics to help you determine whether or not a business is worth investing into.
What Are the Earnings?
Earnings are vital for a stock to be understood as a good investment. With the void of earnings, it is hard to evaluate what a business is worth. While current earnings have been overlooked during the boom of the internet stock, investors still were buying stocks in businesses that were thought to have earnings in the future. Earnings could be determined in this main three ways:
Earnings Growth is described as a percentage. This percentages are gathered from month to month, or quarter to quarter. The premise of earnings growth is that the present reported earnings should be higher than the previous earnings that were reported. I caution you however, some may argue that this is “backward-looking” and that future earnings are more critical. While the pattern of growth is one of the essential tools for a business, the relationship of the growth rate matters.
Quality of earnings factors favorably into evaluation of a company’s status. This process is left to a professional analyst, but the casual analyst could take a few steps to determine the condition of a company’s earnings.
For example, if a business is growing its earnings, but has revenues that are declining while costs are increasing, you can guarantee that this growth will not last the test of time.
What is the return on equity (ROE)?
Return on equity is the measurement of effectiveness of a brand’s management to turn a profit on the money that its investors have entrusted with.
ROE is the purest form of evaluation and could be broken down even further. ROE could be compared to the general market and then to peer groups in industries. Obviously, if there are no earnings, the ROE would be negative. I strongly recommend that you do some research into the company’s historical ROE to evaluate its consistency.
While these three characteristics could lead to a sound investment in a good company, do not settle for them alone. Do your best to gather as many metrics to ensure that you are making the best decision possible.