There are quite a few misconceptions revolving around what to look for in a public stock. While everyone looks to gain steady ROIs (Return on Investments) in the long-run, their strategies to achieve that goal vary. Some focus purely on the financial aspects while others are more concerned with the brand management and leadership. There’s also a few that purchase the stock without doing any research just because it is “well-known” including but not limited to Apple, Google, and Meta. Amongst all this turmoil, it can be difficult to find good investment strategies that are almost sure to give you steady returns on your investment - that’s where I come in. I believe to find a good stock for the long run, it’s essential to look at the quantitative and qualitative aspects which help in evaluating the stocks’s longevity and readiness for the long-term as well as its potential to give you as investor steady ROIs.
Quantitative Analysis
The first aspect that needs to be looked at to evaluate a good stock is the stock’s financials. The financials are the fundamentals of a stock, and if they’re not strong, it’s unlikely that the stock will perform well in the future. The first thing to look for is the stock’s balance sheet. Under this, check the total current assets and total current liabilities that the company has. The total current liabilities refers to the immediate debt that the firm has to pay off in the next 12 months. When you divide the total current assets / the total current liabilities, you should ideally get a number more than 1, which means the company can pay off all of its immediate debt in the next year. Once the balance sheet looks good, you’ll need to look at the income statement. Here, you’ll need to divide the operating income (A company's profit after deducting operating expenses such as wages, depreciation, and cost of goods sold) by the Total Revenue (the total amount of income your company brings in from selling your products/services) x 100. You should ideally look for a number above 15%. The last part of the quantitative analysis revolves around the cash flow - more specifically the free cash flow. The free cash flow essentially refers to the amount of free money that a company has to give back to its shareholders. If the cash flow is increasing from year to year, that’s a huge boon to your analysis as it means the company can give greater dividends. However, if the cash flow is decreasing from year-to-year and the company is still giving dividends, it’s a red flag for your investment because the business will indubitably be unsustainable in the long-run.
Therefore, the three aspects that need to be looked at for your quantitative analysis are:
Total Current Assets / Total Current Liabilities (Ideal is a number >1)
Operating Income / Total Revenue x 100 (Ideal is a number >15%)
Free Cash Flow (Ideal is the free cash flow increasing from year to year. It’s even okay if the free cash flow decreases for a short period as long as the business is not giving dividends to investors).
Qualitative Analysis
Moving on to the latter part of the analysis of a stock - qualitative analysis - there’s three aspects that I believe need to be looked at - brand recognition, news and current leadership. Let’s start by understanding brand recognition. Brand recognition refers to how “recognisable” a brand is. Popular examples of companies with strong brand recognition are Apple and Coca-Cola. When one says the word “Apple”, one is more likely to think about the company Apple than the fruit. Similarly, Coca-Cola is the second most recognised word in the world, with its presence across the globe as the top soft-drink. Due to this strong brand recognition, when these companies likely release a new product, people are more likely to purchase them, leading to greater profits and higher share values.
In addition, News plays a pivotal role in shaping investor sentiment and perception of a company. Positive news such as groundbreaking product innovations or expansion into lucrative markets can significantly boost stock prices by increasing investor confidence and driving buying interest. Conversely, negative news like scandals or disappointing earnings reports can erode trust and lead to declines in stock prices. For instance, Boeing's stock suffered following the grounding of its 737 MAX fleet due to safety concerns, illustrating how adverse events can impact stock performance.
Leadership also profoundly impacts a company's trajectory and, consequently, its stock price. Strong leadership that sets a clear vision and executes strategic initiatives effectively often garners investor confidence. CEOs known for innovation and strategic foresight can drive stock price growth by demonstrating their ability to capitalize on market opportunities. On the other hand, leadership crises, ineffective management, or frequent turnover at the top can undermine investor trust and lead to volatility in stock prices. Uber experienced fluctuations in its stock price in 2019 due to leadership controversies and changes, highlighting the significant role leadership stability plays in investor perceptions.
Therefore, the three aspects that need to be looked for your qualitative analysis are:
Brand Recognition
News
Current Leadership
Tabular Representation of Qualitative and Quantitative Analysis
The tabular template above is an effective way to keep track of all your investments and research regarding different stocks. If you follow the aforementioned steps and spend a maximum of 30 minutes analyzing a stock using the techniques I listed, there’s a very strong chance that all your stocks will make strong returns in the future.
P.S - The balance sheet, income statement and cash flow numbers can be found for free on a website called “Yahoo Finance” for the quantitative analysis of a stock.
What an informative blog by a truly insightful author!!