12 tips on how to research stock for long term investment
Investments in stock market provide best return on investment in the long term. However identifying a good stock is important. But the success of the investment depends on how well you research a stock and find good quality stocks for investment for long term.
12 tips on how to research stock for long term investment
Various parameters should be considered while you do research on a stock for long term investment. Some of these tips would help in answering how to research stock.
1) Revenue growth: Research a stock on how the company’s revenues are growing year on year.
- Positive sign: If the company’s revenue is increasing year on year, it is positive sign. If the full year revenue details are not available, compare the current quarter revenues with previous year same quarter revenue to look for the growth in the revenue.
- Negative sign: If the company’s revenue is decreasing year on year, the prospect of the company is in question and this is a negative sign for the company.
2) Growth in the earnings per share (EPS): Earnings per share (EPS) is profit divided by the total shares held in the company.
- Positive sign: If the EPS is increasing year on year, it would mean that the shareholders of the company are earning more, year on year.
3) Return on equity (RoE): Return on equity (RoE) is the total profit divided by total value of the shareholdings.
- Positive sign: If the return on equity is increasing year on year, it would show that the returns on investments are increasing year on year which is a positve sign.
4) Earnings forecast: Companies usually declare the earnings forecast of future years or future quarters. This gives an indication on how the company is going to grow in future.
- Positive sign: If the earnings forecast shows increase in the revenues, it is a positive sign.
5) Earnings surprises: Every quarter company provides the earnings forecast. If you observe the forecast vs the actual earnings, it could be either positive or negative.
- Positive sign: If the company earnings are more than the forecast, it means, it has over-performed its estimates which is positive sign.
- Negative sign: if the company earnings are lower than the forecast, it means the company is not performing as per its expectation, which is a negative sign.
6) Price earnings ratio (P/E Ratio): P/E ratio is a measure of stock’s value. P/E ratio is computed by dividing the stock price by annual earnings per share.
- Positive sign: PE Ratio < 10 would be good stocks to buy. Invest in 3 to 5 ratio as growth stocks. Ratios below 2 reflect good value priced stocks.
- Negative sign: PE Ratio >10 are only momentum stocks. Invest such stocks only in strong market.
7) Company growth vs Industry growth: Research stock on how the company is growing against the industry growth, which is a good parameter to watch.
- Positive sign: If the company growth is more than the industry growth, it means it is over-performing in the industry and it is good sign.
- Negative sign: If the company growth is less than industry growth, then company is not performing well in the industry. Stay away from such stocks which are under-performing.
8) Promoter’s shareholding – This is one of the parameter which shows direct sign from the promoters, about the company’s future prospects.
- Positive sign: If the promoters of the company are purchasing the stocks and increasing their stake, year on year, than they are confident about the future prospects of the company. This is good sign for the company’s future prospects.
- Negative sign: If the promoters are reducing their stake in the company, it means they are not confident about future of the company and that could be reason for reducing their value in the company.
9) Average daily trading volume: Average daily trading volume in the stock exchanges is also good parameter to check the mindset of the investor.
- Positive sign: If the average trading volume is increasing either quarter by quarter or year on year, then investor’s confidence is increasing and they are buying more and more.
- Negative sign: If the average trading volume is declining, then investor’s confidence is decreasing and they are coming out of the stocks.
10) Investments by financial institutions / Mutual funds: Investments by financial institutions / mutual funds in a stock shows the sign on how the stocks are rated by the research analysts from these institutions.
- Positive sign: If the mutual funds or financial institutions are investing regularly in such stock, it means it gained confidence among them and good stock to buy.
11) Debt management – Research stock on how the company is performing year on year in terms of debt management.
- Positive sign: If the company borrowing/ debt ratio is decreasing year on year, the interest payment would decrease and company profits will increase. This is a positive sign for the company.
- Negative sign: If the company’s debt ratio is increasing year on year, it is negative sign. Such company would pay higher interest and this reduces the profits of the company which is a negative sign.
12) Day sales outstanding (DSO): DSO is the money to be received by company from its customers for the products or services sold at the end of the quarter divided by the revenue of the company for the same quarter.
- Positive sign: If the company is receiving the money from customers on time which can be used as a regular working capital, the DSO would be lower, which is a positive sign.
- Negative sign: If the company is not receiving the money from customers on time and there is delay in getting the money, the DSO would be high. This would mean that the company need to borrow money to run the business which increases the interest costs and this is a negative sign.
Conclusion: Investing in stock markets for long term would provide good returns. However work on “how to research stock” before investing in stocks. The successful investment strategy depends on identifying the good quality stocks.
Readers, what do you think about these tips on “how to research stock”? What other investment tips do you suggest? Please give your comments
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How to research stock for long term investment!!!
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I want to understand what is the impact of stock split on EPS
how is it calculated.
Let’s say a stock having face value 10 is now split into 1:5
So face value is 2 and no of stocks is 5.
So let’s say
EPS = Profit / no of shares held.
So let’s say profit of a company is 100
Shares of FV 10 are 100.
EPS = 100/100
now after stock split, total shares = 500
So, post stock split, how would EPS be calculated???
Thanks for the article.
How can we find the total shares held, total value of the shareholdings, annual earnings per share and other items?
Is there any online tools available to calculate all these parameters?
You can visit several websites like ICICIdirect.com where you can go and analyse a stock. Even equitymaster.com offers, however I do not know how comprehensive it is.
Please suggest me good stocks for long term. and suggest me good mutual fund to invest me for long term with good returns.
Rafi, please refer our post on top-5 best stocks to buy for long term investment. https://myinvestmentideas.com/2012/12/best-stocks-to-buy-in-india-in-2013-for-long-term/. For mutual funds, pls refer our Top-10 mutual funds to invest thru SIP. https://myinvestmentideas.com/2012/12/top-10-mutual-funds-for-sip-to-invest-in-2013/