Gut feeling when buying shares? What you should really pay attention to instead

How stable is the company?

The fact that a company has been on the market for a long time is of course a good sign. But that does not say enough about the company’s financial stability and earning power. And these key figures are very important, because the financial basis must be stable for long-term success. Maybe it’s always just enough, and a crisis can become a problem. Corona has shown it: Even well-established companies did not survive the crisis. You should be aware of the following key figures in order to avoid unpleasant surprises as far as possible:

equity share

The equity ratio shows the equity’s share of a company’s total capital. The higher it is, the better the company’s creditworthiness. A high solvency ratio is a good indication that a company is able to operate stably and solidly. You can be sure that potential difficulties will not result in immediate bottlenecks.

The solidity is strongly dependent on the industry. For example, it is quite low for providers of financial services – according to EU rules, it must be eight percent. But that would be far too little in the free economy. Here, the solvency ratio of a solid company should be over 30 percent.

Dynamic leverage

The dynamic leverage sets the financial net debt in relation to EBITDA. EBITDA stands for earnings before interest, tax, depreciation and amortization. Thus, the dynamic leverage ratio indicates how long it will take a company to reduce its liabilities using current EBITDA. The smaller the ratio, the better. In some cases, a low dynamic leverage ratio can even justify a high leverage ratio. Namely if the company is able to reduce the debt quickly.

EBITDA margin

The EBITDA margin represents the ratio of EBITDA to sales. The higher it is, the more profitable a company is. Look at this number over a longer period of time, because there can always be special effects in the short term. A good EBITDA margin is 10-15 percent. Smaller values ​​are okay if the historical data shows growth.

price-earnings ratio

The price-to-earnings ratio (P/E) is the ratio of a company’s market value to earnings. This ratio tells you how often the earnings per share fits into the current price. The lower the metric, the better. But: a company’s profits can be easily manipulated on the balance sheet.

Therefore, you should never look at P/E individually, but always consider the dependencies between the individual KPIs. Supplement your P/E rating with a KCF rating (course cash flow). This separates balance sheet effects (depreciation).

How good are the growth prospects?

Once you have found a financially strong company, the next step is to look at the growth prospects. Because the financial foundation was built in the past – it is of course just as important that the business model will also work in the future.

sales growth

With sales growth, you calculate the sales development in a company. In addition to looking at the bare key figure, it is also worth looking at the annual report. Because there you will find the management’s forecasts and the competition analysis, which can give you a good overview. In addition, you should acquire some industry knowledge to be able to draw good conclusions. It’s not without effort, but it’s worth it.

Who is this company anyway?

Not a key figure, but a deciding factor for many investors: Who is actually in the company and what do these people think about the important issue of sustainability? It does not always play a big role that the management or CEO of a company is a popular figure – but any scandals can cause lasting damage.

If it’s important to you that you invest in sustainable companies, find out how the person you’re considering thinks about it. In addition to the topic of environmental protection, this also includes employee management and social commitment. After all, you support this company with your money – then you must also support how it acts.

Conclusion share purchase

Buying shares should never be done without thought, because large sums are often involved. Several examples show that it can go horribly wrong. In general, buying individual stocks is riskier than investing in broadly diversified ETFs. This is precisely why you should do thorough research beforehand and not make your decision on instinct or let others persuade you. Digging into metrics and companies is tedious, but it can save you from making the wrong decisions.

Leave a Comment