User talk:Buki-Badejo-Okusanya

6 Questions To Ask Before Buying Shares
There are six questions every investor, regardless of persuasion, should ask before putting down money to invest in any company's stock.

What does the company do? Do you know what the company actually does for a living? Is it in a hot growth sector or in a saturated industry whose best growth days are long gone? That first question is not as silly as it sounds. Sometimes we become so focused on analyzing the numbers that we forget about the big picture. You probably know what the company does if you're looking at an already known company. But it's a different story when you start examining at lesser-known names. You can find out what each company does by running a google search on the quoted company or by checking the Company Report pages.

How many is it selling? Companies are in business to sell products and/or services. We're talking big numbers here. Most publicly traded corporations rack up sales running into the hundreds of millions of dollars annually. However, as an investor, you often encounter companies with a supposedly hot product on the drawing board but with little or no sales. When you buy such companies, you're buying the "story," which may or may not come to pass. That's risky business. However, you can't apply minimum-sales criteria to banks and similar institutions, because their income comes from interest earned, which usually doesn't show up in the sales totals.

Just how profitable is the company? For stocks, profitability means more than not losing money. Here's why. Consider two hypothetical companies, company A and company B, both selling products for $100 each. After considering all expenses, company A makes $50 on each product sold, while company B makes $25 per product. If they both sell a million products a year, company A's profit totals $50 million compared with company B's $25 million. Thus, each year, company A has $25 million more extra cash than company B. It can use that cash to develop new products, build more factories, pay dividends, etc. There is no way that company B can keep up with company A's spending without going outside to raise more cash, either by borrowing or by selling more shares. Both alternatives diminish shareholders' earnings. Obviously, you'd be better off owning stock in company A than in company B, but how do you know which is which? That's where profitability measures come into play. Return on equity, or ROE, the ratio of a company's 12-month net income to its shareholder equity (book value), is the most widely used profitability gauge. But relying on ROE has a downside. The way the math works, all else being equal, the higher the debt, the higher the ROE. By contrast, you calculate return on assets, or ROA, by dividing net income by total assets, which includes liabilities. Consequently, all else being equal, the lower the debt, the higher the ROA. You can see ROAs in the Investment Returns section of the Key Ratios report (under Financial Results). Look for companies with ROAs above 10%. Avoid ROAs below 5%. Growth investors should pay most attention to the trailing-12-months ROA. However, because value stock candidates may have recently stumbled, value investors should focus on the five-year-average profitability figures.

Is cash flowing in or out? Cash flow measures the amount of money that moved into or out of a company's bank accounts during a reporting period. Cash flow is a better profit measure than earnings because it's harder to finagle bank balances than numbers like depreciation schedules that figure into earnings. In fact, many companies that report positive earnings are actually losing money when you count the cash. Operating cash flow measures the cash flow attributable to the company's main business. You can find it on either the quarterly or annual cash flow statement. However, the quarterly statements are timelier. That said, be aware that the quarterly cash flow columns reflect the year-to-date (cumulative) totals, not the individual quarters' results. You want companies with cash flowing in, not out. So look for positive numbers in the Net Cash from Operating Activities row. Though any positive number is OK, it's best if the operating cash flow exceeds the net income for the same period.

Is the company submerged in debt? High debt is not always a bad thing. For instance, there's nothing wrong with a company borrowing at 6% if it can put the funds to work earning 12%. Nevertheless, the higher the debt, the more susceptible a company is to rising interest rates. Rising rates result in higher debt-service costs, which subtract from earnings. The financial leverage ratio (total assets divided by shareholders' equity) is an all-purpose debt gauge. A company with no debt would have a financial leverage ratio of 1, and the higher the ratio, the more debt. As a rule of thumb, avoid companies with leverage ratios above 5. You can't apply the leverage ratio -- or any other debt measure, for that matter -- to banks or other financial organizations. For them, borrowed cash is their inventory. Financial companies always carry high debt compared with companies in other industries.  Any bad news lately? Negative news, such as an earnings shortfall, problems with a new product or an accounting restatement, not only pressure a company's share price but often portend even more such news on the way. Bad news is the death knell for growth stocks, and growth investors should avoid all such stocks. Even value types, who seek out stocks beaten down by bad news, should wait on the sidelines until they're reasonably sure that there is no more to come.