By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
With thousands of stocks to choose from, developing a systematic approach to evaluating stocks can make it easier to make your selections. The first step is to narrow the options to those most likely to help you meet your objectives. That typically involves screening companies based on criteria important to you. For instance, if you are interested in growth companies, you might look for earnings growth over a certain percentage in each of the past five years. Or for value companies, you might look for companies with low price/earnings ratios or low price-to-book values.
Once you’ve narrowed the list, you should evaluate each company’s financial information, comparing it to industry and market information. Some factors to consider include:
Historical Prices – It is often useful to review a stock’s historical prices and trading volume for at least a one-year period. This gives you a feel for price volatility, the pattern of the stock’s movement and how much interest investors have in the stock.
Earnings per Share (EPS) – EPS equals the company’s net income after taxes divided by the average number of common shares outstanding. You’ll typically want to look for companies with steadily increasing EPS.
Price/Earnings (P/E) Ratio – This equals the company’s share price divided by EPS, and is generally considered an indication of how the market values a sock. Review the company’s historical P/E ratio, the P/E ratios of other companies in similar industries, and the P/E ratio of the market as a whole. Typically, companies with higher growth rates command higher P/E ratios.
Return on Equity (ROE) - ROE equals the company’s income divided by shareholders’ equity and is viewed as an indicator of how well a company is utilizing shareholders’ money.
Price-to-Book Value – This ratio is calculated by dividing share price by book value, which equals a company’s assets less its liabilities, per share. This ratio is typically relevant when evaluating companies with significant assets. Companies with low price-to-book values are often considered value stocks.
Price-to-Cash-Flow Ratio – This ratio equals a company’s share price divided by cash flow per share. Cash flow equals earnings plus depreciation, amortization, and other non-cash expenses. This ratio can be helpful when evaluating companies with significant non-cash expenses.
Price-to-Sales Ratio – This is calculated by dividing share price by annual sales per share, and can be useful when evaluating companies with little or no profits.
Payout Ratio – This ratio is calculated by dividing, dividends per share by EPS, and indicates the percentage of profits that the company is distributing to shareholders.
PEG Ratio – This ratio equals a company’s P/E ratio divided by its expected earnings growth rate, and is generally useful when evaluating growth stocks.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale)