One common challenge for newbie share investors is deciding where to park your money. Let’s get you on the right track!

 

To any newbie, a new undertaking may appear daunting and complicated. The uncertainty leads to hesitation and anxiety. The same goes for newcomers in any aspect of the wide world of investing.

You can arm yourself with the basics by doing a little learning daily, such as a few minutes on a couple of articles from finance websites. Diligently make this a habit and you will soon gain familiarity.

If you have been specifically been looking for guidance how to assess a company that you are interested to invest in, then these 4 steps are for you.

Step #1: Can You Explain What the Company Does to a Child?

Before you go about in understanding what financial data is important for a company, knowing what the company does and being able to explain it in layman’s terms to a child is the most important thing to keep in mind. Numbers don’t mean anything without context with what the company does.

Take a google search of the company, and go to its corporate website. The information on what they do is usually found in the “About Us” section or “What We Do”. A good guide on how to simplify your understanding of their business is to ask yourself:

  1. What do they sell?
  2. How do they make money?
  3. Why would I buy their products or services?

For example, this is Maxis’s corporate information from their website, at the time of writing:

“Maxis is the leading converged solutions provider in Malaysia providing a variety of high-quality digital services encompassing voice, data, and solutions. We are passionate about bringing together the best of technology to help people, businesses and the nation to Always Be Ahead in an evolving world. As digitalisation is changing the way we communicate and access services such as commerce, banking, and entertainment, we at Maxis, continue to innovate our products and services leveraging from our leading mobile offerings.”

At first glance, this seems quite complicated to wrap your head around. Take your time to re-read the statements. Now, let’s revisit the questions.

  1. What do they sell? Maxis sells phones and phone plans.
  1. How do they make money? By selling phones and phone plans.
  1. Why would I buy their products or services? So that I can call and text someone far away or near me, and browse the internet for information anywhere and anytime.

Keep your answers simple and in layman’s terms. If a child can understand your answers, then let’s move on to the next tip.

Step #2: Look at Revenue and Profit to See How the Company is Doing

Everyone is different but a good place to start is to simply look at the company’s revenue and profit.

  • Revenue is how much money the company is getting from its clients or the sale of its products.
  • Profit is how much is left after the company pays for all expenses.

Think of revenue as the salary you receive, and profit as what is left at the end of the month after you paid for everything you needed.

You can usually look for this information in the “financial statement” or “income statement” of the company. Have no fear if you are unfamiliar with this. The best way is to google “financial statement of company X” and a few financial websites will appear. The following websites are useful for this purpose:

Typically, 5 years’ worth of financial data are shown. To identify whether a company has been doing well, you will want to see a positive trend across the 5 years in the following areas:

  • Revenue
  • Profit (look for “Net Profit After Taxes” or “Net Income”)
    • Note: “Gross Profit”, “Profit Before Tax”, or “EBITDA” are terms to look into when you are more seasoned. You can skip them for now. 

Just knowing the trend of revenue and profits is actually enough to get a general idea how the company is doing from a financial perspective.

Step #3: Understand the Price-to-Earnings Ratio to Catch a Possible Bargain

Everyone is attracted to buying things at discounts, especially the ones where it goes “75% discount”, or “buy one free one”. However, is this really a good deal? Or is it reflective of a bad product? That 75% discounted banana could be a hidden gem that no one is looking at or it might be already on the verge of being too spoilt to consume.

Price-to-earnings ratio (PER) = share price divided by earnings per share

The price-to-earnings ratio (PER) is an indicator as to whether a bargain is a bargain. Earnings per share are how much profit the company made divided by how many shares the company has. Typically, PER is about 15 times for a normal company, which means the current share price is 15 times higher than the earnings of the company in that given year.

A PER that is about 7.5 times (below 15 times) would be the equivalent of getting about a 50% discount on the stock’s share price. A PER that is 22.5 times would mean that it is about 50% more expensive to buy that stock.

However, you have to ask yourself why is the stock cheap now. Is it because no one is paying attention to the stock? Or is it because the company is bad?

There is no easy answer to this. You would still need to do your research into figuring out whether the company is a good one, and that will require quite a lot of reading and getting a feel of it. Calculating the PER to find low PER stocks will help you narrow down your options.

Step #4: Use Dividend Yield to Find Companies that Give You Consistent Returns

An intuitive way to understand dividend yield is to think about house rental. Imagine you own a house that is worth about RM500,000, and you are getting a yearly rental of RM24,000 (monthly rent: RM2,000). This translates to about 4.8% (RM24,000 / RM500,000) return for the year.

Dividend yield = dividend divided by share price

The company will give dividends to investors who bought their shares. By calculating the divided yield, you can more clearly see your returns. For example, if the share price is RM5 and the dividend is RM0.50, this translates to a dividend yield of 10% (RM0.50 / RM5.00). This means the higher, the better.

However, that is not the only thing you are looking for.

You should also be looking for a company that consistently gives out dividends to you. Study the dividend history of the companies you are interested in (if looking at a Bursa Malaysia-listed company, you can refer to malaysiastockbiz). The more consistently the company gives out dividends, the better certainty you have on a steady stream of income you can receive. Sometimes, stable income beats higher returns that are riskier. The choice is yours.

Conclusion

If you are feeling lost on how to start analysing financial data of companies, don’t let that put you off. Start somewhere no matter how small, as it will help you overcome the fear of trying. The journey of a thousand mile starts with a single step. In this case, you can start with the four steps outlined in this article.

 

Let us know in the comments below how you want to take that first step!

 

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