Stock picking (deep dive)
For those who want to pick their own companies — requires more time and patience
Before you buy a stock, you should be able to answer a few basic questions. Here are the most important metrics.
P/E ratio (Price / Earnings)
Share price divided by earnings per share. Shows how many years of current profit it would take to earn back the price. A of 15 means you're paying 15 years of earnings. Lower is cheaper — but often for a reason.
Earnings growth
Has profit grown 5, 10, 15% a year over the past 5–10 years? Steady growth is gold. Volatile or declining profit — be careful.
Debt levels
to under 2 is good. Above 4 is risky. Highly leveraged companies are vulnerable to rate hikes and downturns.
Dividend
yield equals annual dividend divided by share price. 2–5% is common for mature companies. Also check whether the company has been able to raise the dividend year after year — that's a sign of quality.
ROE (Return on Equity)
Profit divided by shareholder equity. Consistently above 15% signals a quality company. Buffett checks this before almost anything else.
P/E, growth, debt, dividend, ROE. Five numbers that give you 80% of the picture in 10 minutes.
Analyse a company in Scouting →What does a P/E of 15 tell you?