Key Fundamentals: Sales, Margins, Return On Equity
The Launch Pad
OK, let's say you've found a company with great sales
growth, profit margins and return on equity. What's
next? As good as these indicators may be, don't ignore
other critical factors, such as a stock's earnings growth
(the earnings lesson discusses how to evaluate earnings.),
institutional sponsorship (The amount of buying by mutual
funds and other institutional investors is important
and is discussed in the sponsorship lesson) and relative
price strength. (Relative Price Strength Rating takes
a stock's price performance over the past 12 months
and compares it to all other stocks. The rating is expressed
on a scale of 1 to 99, with 99 being best. This is covered
in the leaders lesson.) Also, studying a stock chart
completes the stock selection picture. (Charts are explained
in detail in the charts lesson.)
Key Points To Remember
- Strong sales growth is one key indicator of a company's
success. Quarterly sales growth should be up at least
25% in the most recent quarter. Otherwise, they should
be accelerating.
- Profit margins tell you how much of a company's
sales end up as earnings after expenses. Generally,
the higher profit margins, the better.
- Return on equity measures how well a growth company
can produce earnings with shareholders' capital. Look
for ROEs of at least 17%.
- You don't have to check the company's financials
to be sure a company's sales, margins and ROE are
acceptable. Just check the SMR Rating, making sure
your stocks are rated "A" or "B."
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