It can be overwhelming when you are evaluating a company and considering adding it to your portfolio, but I believe there are five numbers that are key with any company.
Before investing any money into a company, make sure you look at these five numbers. They can tell you exactly when to buy a stock or when to let it pass you by.
Return on investment capital is an extremely important number to look at. This number will show you how the company is using the money that it invests back into operations. If this number is strong, that is usually an indication that the management team is looking out for the investors, which is me and you.
If a company has been around long enough, let’s say at least 10 years, then I believe that this number should be no less than 10% on average.
Apple (AAPL) is a perfect example of a company with a strong ROIC with an average of over 25% over the past decade.
Sales growth rate
This one is pretty self explanatory. Are sales increasing or decreasing each year?
The idea here is to see sales growth of at least 10% each year, on average. You should note that events can happen from time to time which can drastically skew this number in the short term, so I believe it’s best to look over the long term.
If a company is increasing sales each year then it is more than likely a strong company that will continue to grow year over year.
EPS growth rate
Earnings per share growth rate is the third number that I look at when evaluating a company. This number shows the track record of how much money a business is making for its owners over a given period of time due to changes in their profit and issuing out new shares.
If this number is increasing each year then it’s a good indication that the company has strong fundamentals and is probably worth the consideration.
Equity growth rate
Although standard equity can vary within different industries, the equity growth rate will show you if a business can continue to generate cash that they can use to continue paying off any debt.
If this number is strong, it will also allow a business to increase its impact in the market as well as focus on developing new products.
Operating cash flow growth rate
This number will show us if the business is able to grow its real cash while continuing to increase its profits. Having cash on hand is key for a business to sustain long term and continue growth each year.
If this number is too low or not growing it can be an indication that a company might have to take on more long term debt in order to keep operating at optimal capacity and keeping up with its competitors.