Profitable Stocks: How to Know if it’s a Good Investment

profitable stocks

It is hard to find profitable stocks that will continue performing well on the market. There is always a risk with investing, but the more you understand the stock market and its forces, the better decisions you’ll make. It is essential to check out multiple factors to determine if a stock is profitable before investing. You want to make sure the choice you are making is in your best interest.

Company Standing 

Before getting into the technical aspects of a company, check out the basics – if the company is in the green. Look at their cash flow statements to ensure that more cash is coming in than going out. Also, look at the company’s balance sheet. It would be best if you understood an organization’s assets to know what they’re putting money towards, as well as their outstanding debts. Determining a company’s book value can also contribute to having a better understanding of a company’s standing. These basic checkpoints can help you determine whether to invest in that company or not.

Historical Prices

The most obvious factor used to determine if you’re investing in profitable stocks is price. However, you cannot just look at the selling price to know if you’re making a good investment. You must compare the business’s historical stock price to the amount they are selling for now. If there is a solid increase in the stock’s price over time, then you can tell that the company has continually performed well on the market. Comparing the historical price is also essential because it will show you if you buy the stock for a good value based on its previous cost. Price plays a significant role in determining if you are getting a good deal and if the company performs well on the market.

Earnings Per Share

There are several financial ratios used to evaluate stocks’ performance. One of them is earnings per share (EPS). EPS is the net profit a company receives divided by the number of common shares outstanding in the company. For example, say a company makes a net profit of $70 million in one quarter, with 10 million shares. If you hold one share in the company, you will make $7.00 at the end of that quarter. However, companies typically reinvest their profits back into the business, so you would not actually make this profit, at least not until the business has been liquidated. Check out this ratio to ensure that you invest in a profitable stock, not one with earnings per share in the red.

Price to Earnings 

The price-to-earnings ratio (P/E) is vital in determining if a company is overvalued or undervalued. One can calculate P/E by taking the current share price and dividing it by the total earnings per share over the past 12 months. For example, if a stock is trading for $50 and the yearly EPS is $5 a share, the price/earnings ratio will be 10. The higher the price-to-earnings ratio, the higher the quality of the investment.

Debt to Equity 

Another helpful financial ratio is the debt to equity (D/E). It is used to determine how risky is the investment. You want to find out if their debt overshadows their equity financing. Calculate D/E by dividing the company’s total liabilities by its total shareholder equity. For example, if a business has $5 million in debt and $20 million in total shareholder equity, D/E would be .25 for the organization. This would be an example of a low-risk investment because the ratio is lower than 1. However, if the D/E ratio exceeds 2, it would be a high-risk investment. Ensuring that the company you invest in does not have too high of a D/E ratio is important when making investments.

Company Strength and Performance
profitable stocks

Learning more about the industry helps with purchasing profitable stocks. There is a lot of competition in the market. It is better to invest in high performers who have stayed at the top rather than companies that may not have the best track record. When looking at companies in the energy drink industry, Monster and Red Bull have consistently dominated the market in this sector. Based on their history, they have continued to grow and remain industry leaders. Both would be beneficial investments in the energy drink sector due to their high performance. Determining high performers in the industry you wish to invest in is essential to making a good investment.

Company Leadership and Culture

Under good leadership, a company can perform well financially and thrive. Such an organization will be able to gain more revenue, make higher profits, and have a better standing in the stock market. Under good leaders, there is less employee turnover because employees wish to help the company succeed. Many studies have found a positive correlation between great company culture and strong financial performance. For example, a culture of diversity and inclusion increases job satisfaction, motivation, and enhances the decision making at the organization. This leads to increased productivity and positively affects the bottom line. 

There are many ways to determine if the stock you want to purchase would be a beneficial investment. These are just a few of the ways to know if you are investing in profitable stocks. Make sure that you do thorough research before buying and understand the risks. If you do this, then you will be able to make money in the stock market.

To learn more about what can affect the stock market and your investments, check out this article.