Professionals use these stock metrics to select their stocks

the stability of the company

First and foremost, the financial stability and earning capacity of a company are important. This is especially important for business models with seasonal dependencies. The more solid the economic base, the easier it is to overcome crises and open up new growth channels. To determine the stability of a business, professionals pay particular attention to the following four key figures.

equity ratio

The solvency ratio shows the equity’s share of a company’s total capital. The higher, the better the company’s credit rating. Companies with high solvency show that they are able to operate stably and solidly. One can assume that liquidity is secured and that there will be no bottlenecks. The solvency varies depending on the industry.

It is usually low for financial service providers – according to EU rules it should be eight percent. In the free economy, however, this would be too low. Here the rule is that a solid company must have a solvency of over 30 percent.

Dynamic gearing

The dynamic leverage represents the ratio between net financial debt and EBITDA. EBITDA stands for earnings before tax, interest payments and depreciation. The dynamic leverage therefore shows how long it will take for a company to reduce its liabilities with the current EBITDA. The smaller the number, the better. In some cases, low dynamic leverage can even justify a high leverage rate if the company is able to quickly reduce its debt.

EBITDA margin

The EBITDA margin represents the ratio between EBITDA and sales. The higher it is, the more profitable the business. When analyzing stock ratios, make sure you evaluate key ratios over time to hide special effects. An EBITDA margin of between 10-15 percent is considered solid. The same is true here: Smaller values ​​are acceptable if the growth is reflected in the historical values.

P / E

P / E (“price-to-earnings”) calculates the ratio between a company’s market value and its earnings. It shows how many years it takes to “finance” the current market value with the current earnings. As an investor, this means: How often does the earnings per share into the current price. The lower the metric, the better. Consider one thing: a company’s profits can be easily manipulated on the balance sheet.

For this reason, the key figure in isolation is not suitable for determining the attractiveness of a share. Instead, you should always consider the dependencies between the individual KPIs when analyzing the stock ratios. Supplement a P / E valuation, for example with a KCF valuation (price cash flow) – in this way you eliminate balance sheet effects (depreciation).

Tip: With the extraETF finance manager you can monitor and analyze your portfolio, identify cluster risks and create watchlists for your preferred securities.

growth prospects

After an analysis with the key figures above, did you come to the conclusion that you came across a stable company? Not bad. In the next step, we turn to the growth prospects. An economic foundation has been built in the past – you should make sure that the business model remains sustainable.

sales growth

You use sales growth to calculate the development of a company’s sales. Also, make sure that the period is longer to eliminate short-term special effects. In addition to the pure key figures, you should also take a look at the annual report and assess the management’s forecasts. What I also like to do is analyze the competition.

How is the business with other companies in the industry? What growth prospects do they expect? Find out industry-specific innovation potential and read industry studies to get an accurate picture of growth potential. It requires an effort that you should never shy away from when choosing stocks.

leadership and sustainability

Finally, at the end of an evaluation, I always take a critical look at the management and sustainability of a business. Learn more about management on LinkedIn, read for example interviews and the latest news. The more sympathetic and competent the management is, the greater the trust in the company.

This ensures, among other things, that you develop a higher personal bond and prevent impulse reactions. After all, sustainable business management is very important to me. Is the company interested in its environment? Are the employees happy? Have there been any negative headlines lately? All of these factors will help you round off the overall image of your business.

Why stock metrics are so important

Inventory analysis is time consuming but worth the effort. Do not listen blindly to presumed expert tips, but always examine a company critically before making an investment. Set up an evaluation system with the corresponding key figures and follow this system consistently. In the share profiles at extraETF, you will find a comprehensive overview of the most relevant key figures without having to calculate them manually.

Finally, I have another important tip: Individual stocks are more exciting than ETF investments, I feel the same way. Nevertheless, you take on a large cluster risk with a single stock. Investment portfolios with many individual stocks are also difficult to manage – especially for beginners. For this reason, I always recommend investors to have a solid ETF base (the portfolios) and a few individual stocks as a return boost.

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