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Investing in Stocks For Beginners – How to Analyze Earnings and Growth

How to Analyze Earnings and Growth
How to Analyze Earnings and Growth

When you are considering investing in stocks, you need to do a little research on the earning record of the company. If a company doesn’t have a consistent record of earning in the past, you should remove it from the list of stocks you are considering for investing your money in. This research is easy to do, just pick annual reports of last few years and read them. If you don’t find annual reports, use Google and find a web resource from where you can get last ten years record of listed companies.

Ideally, a good stock for investment should have a consistent record of earnings for the last ten years. Many companies do well for two three years and then they go awry. Do not trust these companies with your money. One more thing that makes a company attractive for investment is if it has been growing its earning over the years. That says a lot about the future potential of the stock.

You should also see how much cash is coming from the operating activities. This information can be found in the Cash Flow Statement. There are three heads of Cash Flow Statement- Cash flow from operating activities, from investing activities and from financing activities. You should be interested in Cash Flow from operating activities. This is the actual cash the company is generating from its business.

Cash flow from investing activities is the cash flow from investment in financial instruments or cash used by investment in capital assets. Cash flow from financing activities is the cash flow resulting from issuing dividends, borrowing or paying debt and issuing equity. If the company is not able to fund its growth from the cash it is generating from business, it may not be a very healthy sign. However, if the company is in a start up phase or is thinking about big-ticket investment, it may have to fund its growth through loan or issuance of stocks. You need to make a judgment based on your analysis of the situation.

Understanding the stability and growth of earnings of a company helps you decide whether you should consider the stock of the company for investment or not. Apart from earning stability and growth, you also need to analyze dividend payment record, management quality and intrinsic value of a stock, before you decide on picking a stock for investment.

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