Issue 7 of Stock Selection Criteria
You are doing great! You’ve made it really far and I want to take a moment to congratulate you on your progress!
The next thing we will look at is the profitability of the company.
Is the company making good and increasing profits? Is the profit increasing every year or is it decreasing?
And how much is their margin? In other words, for every $100 the company makes from selling their product or service, how much do they keep as profit? If they keep $20 or $30, that’s quite good. If they keep even more, that’s awesome! But if they only keep $0.50 of every $100, that could potentially be a problem. What if their costs go up a little bit? They may perhaps start making losses unless they can find a way to increase the prices of their product or service!
So today we will look at the revenue and profit of the company. The revenue of the company is the amount of money received by selling goods and services whereas profit is the money left after paying all bills and other business expenses.
Again, we will head on over to the financial times website and on the top right corner in the field called “Search securities”, enter the name of your company. I am going to use Coca Cola as an example again. If you search and go to the page for Coca Cola, you will end up here. Then go to the “Financials” tab and under that, click on “Income Statement.” Here, we can see that Coca Cola’s revenue was 46,854 in 2013, 45,998 in 2014 and 44,294 in 2015. Again, figures are in millions of USD as noted on the top left. As we can observe, the revenue is decreasing.
The next thing we want to look at is the net income. This refers to the net profit after all expenses including taxes. As we can see on the website, Coca Cola’s net profit has been 7,351, 7,098 and 8,584 in 2015, 2014 and 2013 respectively.
Ideally, we would want revenue and profit to always be increasing. However, in reality, it can be hard to find an ideal and perfect company.
The last step is to take the net profit for the last year and divide it by the revenue of that year. Then multiply by 100 to get the percentage. The number you get tells you how much money out of every $100 the company gets to keep as profits for the shareholders. For example, in case of Coca Cola in 2015, their net profit was 7351 and revenue was 44294. So its net profit margin is 7351 divided by 44294 and then multiplied by 100 which gives us 16.6%. This means that for every $100 Coca Cola earns by selling its products, it keeps $16.6 as profits after all expenses.
If we’re looking to buy a stock, we’d want to buy stock in a company that has a large profit margin. This is a sign that the company is efficient and probably has a very good product or service which is why it can charge a good price. As a rule of thumb, a net profit margin of 15% or more is considered good. The higher the margin is, the better of course.
With that, its homework time again! Take a few mins to go to the financial times website, enter the name of the stock you have chosen and determine what is happening to its revenues and profits. Is it increasing, decreasing or staying the same? What is the net profit margin? Are you comfortable with it?
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Take care and see you tomorrow!!
Legally Required Disclaimer: All information provided is solely for education and is not a recommendation or advise to invest. The course provider will not be liable for any losses, financial or otherwise incurred. This course will contain examples of several stocks in order to enhance the learning experience. No recommendation or advise to invest in these stocks is intended. Every step has been taken to ensure accuracy of the information but not assurances of the accuracy are made and the author will not be responsible for any inaccuracies. Investors may wish to seek professional guidance before investing.