Think Smart and making mega bucks? How ?

One of the basic features of a stock is the business model of the company, which makes it a defensive or aggressive bet. A growth stock is likely to perform very well in a bull run, while a defensive bet may pay off in a bearish market.

Cash is king. This is not only me but everyone says these days. The net cash that a business generates through its operations, as reflected in the company’s cash flow statement, is also a critical feature. It is important for a company to have a positive cash flow from its operations. A company can report net profit in its profit & loss account without generating a positive cash flow from the socalled ‘profitable’ growth.

I think this is a very vital tool to measure a company’s leverage. A low debt-equity ratio is generally preferred, but is not always necessary. Companies in capital-intensive sectors like infrastructure, real estate, cement, steel and oil & gas typically have high debt-equity ratios, while those in sectors like FMCG, IT and pharmaceuticals generally have low debt-equity ratios.

This is one saying which everyone might have heard at least once in their lifetime. With market valuations having fallen drastically, many investors seem to be rummaging for value picks. But they must remember, all that glitters is not gold. An investor must have the skill to spot the good stocks from the bad ones.

The price-to-earnings (P/E) multiple of a company cannot be an important indicator by itself, unless it is considered in comparison with the P/E multiples of other companies in the same sector, or against the company’s own historical P/E, or against the market’s P/E.

This ratio of the stock’s market value to book value helps in knowing its relative under or over-valuation. A lower P/BV multiple typically indicates that the stock is under-valued, but this may not always be the case. Again, this ratio varies from industry to industry. A capital-intensive industry will typically have a lower P/BV multiple. Banks generally use this ratio, because unlike manufacturing companies, they measure their assets at market value.

Being a shareholder, I am only interested in investments. A company which consistently pays dividends implies it’s rewarding its shareholders. Preference should always be given to a company with higher dividend yield. Higher the yield more is the investor’s return on his/her investment. However, long-term investors should be wary of companies which dole out dividends at the cost of growth. It is also important to compare growth in dividend to growth in profit.