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11 Stock Picking Metrics You Need to Know

11 Stock Picking Metrics You Need to Know

11 Stock Picking Metrics You Need to Know

11 Stock Picking Metrics You Need to Know

 

When picking stocks, these 11 metrics will help you identify if a business is fundamentally strong.  These metrics will help you screen for high quality stocks that are producing exceptional business results and have a margin of safety.  These stock picking metrics will provide you with an idea of a company’s valuation, growth and dividend income.  This exact stock picking strategy is implemented in Stratosphere Premium to find superior businesses in my own portfolio.  I will provide what range this metric is preferred when analyzing the business on a rule-of-thumb basis.

 

1. P/E = Price to Earnings Ratio

The price to earnings ratio, or PE, is a calculated by dividing the share price by earnings per share over the last 12 months.  This will give you a very quick idea of how expensive the stock is compared to how much profit the company is generating every year.

We want this metric to be low.

High: Over 30

Medium: 15-30

Low: Less than 15

2. Dividend Yield

Dividend yield is the annual amount in dollars paid out in a company’s dividend in the last 12 months divided by the current share price.  For example, if a company paid $4 dollars out per share via dividend and each share is trading for $100 dollars.  The yield is 4%

 

We want this metric to be high.

High: Over 3.5%

Medium: 1.5%-3.5%

Low: Less than 1.5%

 

3. ROE = Return on Equity

Return on equity, or ROE, is calculated by dividing a company’s net income by their equity on their balance sheet (which can be better understand by the net worth of the company).  Equity is calculated by subtracting assets from liabilities.

 

We want this metric to be high. 

High: Over 20.

Medium: 10-20

Low: Less than 10

 

4. Market Capitalization

Market capitalization, often referred to as just Market Cap, refers to the value of the entire company on the stock market.  This is calculated by multiplying all the shares in the company by the share price. 

 

There are no requirements for if we want this metric to be high or low.  It depends on what size of companies you are comfortable investing in.  Larger market cap is thought of to be more safe and stable companies.

Mega cap: over $300B

Large cap: $10B – $300B

Mid cap: $1B - $10B

Small cap: $300M - $1B

Micro cap: $50M-$300M

Nano cap: Less than $50M

 

5. Payout Ratio

Payout ratio is the percentage that a company paid out in the dividend compared to their net income.  It is important that the payout ratio does not exceed 100% because the company is paying out a dividend that they cannot really afford.  This means the company will be at risk of cutting their dividend or incurring debt to pay for the dividend.  If the payout ratio is lower, the company has more room to safely increase the dividend payouts year over year.

We want this metric to be lower, preferably.

 

6. Dividend Growth (%)

The dividend growth in a percentage indicates how much a company has increased their dividend over a certain period of time.  Dividend growers are notorious for compounding serious returns for shareholders over time.

 

We want this metric to be high. 

High: over 15%

Medium: 5-15%

Low: Less than 5%

 

7. D/E = Total Debt to Shareholders Equity

D/E simply indicates the amount of total debt a company has total equity (think about net worth).  If the economy goes south or revenues and profits start to contract, the company needs to have sufficient equity to pay debt.

 

We want this metric to be low.  The ranges vary significantly depending on what sector the business operates in.  Financial companies that are in the business of lending money are going to be significantly more leveraged than the average.

High: Over 1.5

Medium: 0.7-1.5

Low: less than 0.7

 

8. P/S = Price to Sales Ratio

Similarly, to price to earnings, P/S simply divides the current share price by total revenue.  Some studies indicate that buying companies trading at low multiples compared to sales outperform the broader market.  It does not tell the whole story with profit margins and that is why you should combine many metrics in your analysis to avoid mistakes.

 

We want this metric to be low.

High: Over 4

Medium: 2-4

Low: 1-2

Very low and ideal: Less than 1

 

9. Current Ratio

Current ratio is how many current assets (like cash) has compared to current liabilities.  This is an indication of how healthy a balance sheet is the short term.

 

We want this metric to be high.

Over 1: Indicates they have sufficient current assets to pay current liabilities.

Less than 1: Indicates the company may have issues paying liabilities coming due.

 

10. P/B = Price to Book Ratio

The price to book ratio indicates how much you are paying for each dollar of the total equity.  For example, a PB ratio of 0.8 means that you are getting a 20 cent discount on every dollar you spend on the net worth of the company.

 

We want this metric to be low.

High: Over 3.5

Medium: 1.5-3.5

Low: less than 1.5

 

11. Revenue Growth (%)

Revenue growth (%) is a year over year change in a company’s total revenue over a given period of time. The growth of a business’ top line is critical and is usually a more telling story of how the company is growing compared to earnings.  Stratosphere Investing’s SI Score that is calculated for Premium Subscribers, prefers revenue and dividend growth more than any other growth metrics such as earnings growth.  Using some tricky accounting practices, earnings can be misleading and vary greatly each quarter due to macroeconomic factors in the industry.  If the revenue growth is negative, that means the company has contracting top line revenue.

 

We want this metric to be high.

High: Over 15%

Medium (still good): 5-10%
Low: Less than 5%

 

The Bottom Line:

Use these metrics and know what to look for when screening the market.  The best part is you do not have to do any calculations as every screener, finance website or discount brokerage has already done the math for you. 


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