Earnings are a good way to measure a company’s progress and to gauge if the business is on track to achieve the long-term goals it set out to achieve.
The best way to assess earnings, however, is to see how much of a return you have in a given period, says David Johnson, chief executive officer of financial analytics firm ConvergEx.
You can then compare this to what you might expect if you were to buy the stock in question at the current price, he says.
If you see a large amount of returns over a short period, you may have a positive view of the company and, if you’re patient, you might be inclined to keep investing.
you don’t see returns, or you see big returns over the long term, you should change the direction of your investment, Johnson says.
‘Be wary’ There’s a lot to consider when choosing whether to buy shares in a company.
Are you investing in a growth company or a business that’s growing?
Are you looking for a business to get a quick return?
Are the company’s growth prospects good?
Are they well-capitalised and have a long-standing track record?
Are their competitors weak?
If you’re considering buying shares, be wary of companies that are struggling to grow, says Richard Nairn, founder of investment consulting firm Nairns Investment Consulting.
‘If you buy, make sure you understand why the company is struggling and where the opportunity lies.’
Be wary of ‘bust’ companies If a company is experiencing an unusual or sudden downturn, such as the collapse of a major asset, buy the shares before the collapse occurs, Nairnd says.
This way, you’ll be able to hedge against any losses the company might suffer.
If a stock is going through a period of low growth and you’re unsure of the direction it’s heading, consider buying shares at a discount to the underlying market price, Narm says.
A company with low growth is a good example, he adds.
‘You should take the view that growth is not a panacea, but it can be a hedge against a period when the company will struggle.’
Find out how to buy stock If you have questions about buying a stock or investing in it, take a look at the relevant financial resources at ConvergEX.
The Financial Times recommends you buy stocks and bonds from a specialist.
‘The best way is to go into the stock market and ask a few questions and compare returns from other companies and the market,’ says Mark Hetrick, chief investment officer of investment advisory firm Hetricks Financial.
Hetrich says you should also look at investment quality.
‘As an investor, if the company doesn’t seem to be well capitalised or the share price isn’t rising, it’s probably not worth it to invest in it,’ he says, adding that it’s best to buy a ‘high quality’ stock and invest in companies with a long track record.’
If you are buying shares and you see they’re earning more than they spend, it will indicate that the company has a good chance of succeeding in the future.’