The number of DIY investors is on the rise as the internet provides information and opportunity aplenty for those seeking to grow their wealth. Information on businesses is as accessible as ever, and for those willing to put the hours in, success on the stock market is attainable for budding investors. This article, with insight from Laith Khalaf, head of investment analysis at AJ Bell, will examine some of the useful metrics and resources investors should be focused on when it comes to choosing where to put their money.
“Probably the biggest store of valuable information for investors lies in the results and reports presented by companies to the stock market. Institutional investors have no special treatment compared to private investors here,” said Khalaf.
The results are delivered to the market as a whole at the same time, and for UK stocks can be found on the London Stock Exchange website at 7am each day, or on companies’ investor relations websites.
The reports can be lengthy, however, and so it is important to know what to look out for.
Earnings Per Share
A key figure to look out for when a company releases its results is Earnings Per Share (EPS). EPS tells investors what profits the company is making for each share they hold.
“First, consider how it compares with prior periods to see if earnings are heading in the right direction, taking into account any one-off boosts or dents in profits that aren’t repeatable. The Chief Executive’s commentary which goes along with the results should alert you to such factors, particularly the ‘outlook’, which looks ahead to the following year,” said Khalaf.
“Second, divide the share price by the Earnings Per Share figure to derive the Price Earnings ratio, which is a measure of how expensive the shares are compared to the profits the company generates.”
Dividends
The dividend is another key figure in the reports and accounts for investors to mull. This is especially true for those seeking to gain passive income from their investments.
“It’s worth comparing the dividend per share to the earnings per share and considering how big a proportion of profits are being paid out as dividends,” said Khalaf.
“If it’s a high percentage, it may be a sign that dividend growth is likely to be limited, or in extreme cases that the dividend is unsustainable.”
Additionally, there are companies which prefer to reinvest profits over paying dividends. Major tech firms such as Amazon and Alphabet are known for this approach.
Profit Margins
Profit margins ultimately determine a company’s performance. A low profit margin suggests there is little room for error, while a higher profit margin means a company may be better to prepared to deal with any unexpected disruptions.
“Bear in mind some industries simply have low margins, for instance supermarkets and construction. While it may be less of an issue for the former as consumer demand for groceries is relatively stable, construction projects can often run late or over budget, wiping out profits and leading to losses – precisely what happened to Carillion before it collapsed,” according to Khalaf.
Debt
Investors should concern themselves with how much debt a company is carrying. When it comes to annual results, net debt is the key figure. “Again you can compare with previous periods to see if it’s heading in the wrong direction, which could be a warning sign,” said Khalaf.
Broker Forecasts and Ratings
Even if you are willing to put the time and effort in, it is still worth knowing what analysts’ opinions are on your investments. However, while analysts provide useful insights, they “tend to focus heavily on the next twelve months, whereas investors should be thinking about becoming an owner of a company for five to ten years or more”. It is important to use analysts’ insights to supplement your actions rather than to fully guide them.
Diversification
Diversification can help one manage their risk and lower the volatility of a portfolio. If all the companies you select are in the same country, or in the same industry, then your portfolio will be extremely vulnerable to a downturn in those areas. “If you’re going to be an active stock investor, you have to accept that you will get some things wrong, so protecting your portfolio from your own mistakes should always be a key consideration,” said Khalaf. Selecting diversified funds alongside your stock picks can allow investors to get the best of both worlds.
