--- title: "How To Evaluate A Company and Their Stocks (2024)" description: "Discover why savvy investors prioritize evaluating a company's fundamentals over just stocks. Find out how you can do the same." url: "https://www.mrmoneytv.com/articles/how-to-evaluate-a-company-and-their-stocks-2024/" category: "Investing & Market" author: "Finlit" published: 2023-08-30 updated: 2024-08-13 source: "Mr Money TV" --- # How To Evaluate A Company and Their Stocks (2024) Discover why savvy investors prioritize evaluating a company's fundamentals over just stocks. Find out how you can do the same. ## Key takeaways - Evaluate the company's fundamentals, not just its stock price. Think of the stock as the shimmering surface of a lake, and the company as the health of the ecosystem underneath. - Check operating cash flow in the Statement of Cash Flows. Consistent positive operating cash flow, as Tenaga Nasional Berhad has posted, signals the business can stay solvent without external financing. - The gearing ratio shows how much of a company is funded by debt versus equity. A higher ratio means higher risk but also potential for higher returns, as with AirAsia's capital-intensive, high-gearing past. - Profit margin measures how efficiently a company turns sales into profit. Compare it against peers, and remember margins can differ across a company's segments, as with Genting Malaysia Berhad. - Don't panic when a major shareholder sells. Monitor announcements on Bursa Malaysia and find the real reason, which could be a strategic investor coming in. - Track macro indicators like GDP growth, inflation, and foreign exchange rates, because a healthy company's share price follows eventually while you can't control the price itself. When considering an investment, the flashy ticker symbols and daily stock price movements might catch your attention. However, savvy investors often emphasize evaluating a company rather than just its stocks. But why is this so? And **how can you do the same**? The secret behind Peter and Frankie's investments. ## Delving Deeper Than Stock Prices As Peter and Frankie see it, imagine **stocks** as the shimmering surface of a lake. They reflect **what's happening now**. But what lies underneath, the **health and vitality** of the aquatic ecosystem, symbolizes the **company**. ## Here's why and how you should evaluate a company before investing: #### Cash Flow **Why:** A company's ability to generate positive cash flow consistently indicates its capacity to remain solvent and meet its obligations without external financing. It's the lifeblood of any business. **How:** Look at the **Statement of Cash Flows** in a company's annual report. Focus on **operating cash flow**, which shows how much money the business brings in from its core operations. **Example:** Tenaga Nasional Berhad has consistently posted positive operating cash flows which is a sign of its robust business operations. #### Gearing Ratio **Why:** This ratio measures a company's **financial leverage**, indicating the proportion of its operations funded by **debt versus equity**. **How:** ![Gearing Ratio Formula](../../assets/articles/how-to-evaluate-a-company-and-their-stocks-2024/img-1.png) A **higher ratio** could indicate **higher risk** (e.g.: the company being unable to repay their debt), but also **potential for higher returns** (e.g.: the company might be expanding)**.** **Example:** AirAsia had a high gearing ratio in the past due to its capital-intensive nature. So, investors had to determine if such debt levels were sustainable in the long run. #### Profit Margin **Why:** Profit margin reflects how efficiently a company can **convert sales into profit**. Typically, you’ll want to look for a business that maximises profit while minimizing costs. **How:** ![Profit Margin Formula](../../assets/articles/how-to-evaluate-a-company-and-their-stocks-2024/img-2.png) A **higher margin** suggests **better efficiency and control over costs**. You can also **compare their margin with their peers** to see if their performance is at par with industry standards. **Example:** Genting Malaysia Berhad, a diversified conglomerate, has different profit margins across its segments. Evaluating these margins can help investors understand which segments drive the company's profitability. #### Shareholder Activity **Why:** **Significant buying or selling** by top executives or major shareholders can be a strong indicator of a company's **future prospects**. **How:** **Monitor announcements** on Bursa Malaysia or news reports about significant shareholding changes. And if let’s say a major shareholder is suddenly selling the stock **don't panic** thinking that something could be going wrong. Instead, **find out the true reasons for such transactions** because it could be that the shareholder is selling their stake to another strategic investor that could bring the company to new heights. **Example:** If the founder of a leading tech start-up increases their stake in the company, it might be seen as a vote of confidence in the company's future. #### Macro Conditions **Why:** Companies don't operate in a vacuum. The overall **economic and political landscape** can significantly influence a company's performance. **How:** **Keep track of key macroeconomic indicators**, like GDP growth, inflation rate, or foreign exchange rates. **Read up even more** and **stay in touch with major events and happenings** that surround the company. **Example:** The Malaysian palm oil industry can be affected by international trade policies, currency fluctuations, and even environmental concerns. You’ll want to be aware of these if you’re investing in companies like Sime Darby or IOI Corporation. ## The Big Picture: Evaluate Both The Company and Stocks Investing isn't just about catching the next hot stock. In fact, we don’t have control over the stocks as the price is based on market forces. It's a **careful, informed assessment** of where a company stands and where it might go in the future. This is why, what we can do is evaluate how a company’s management controls and steers their business to create value for shareholders like you and me. And if the company is healthy, its share price will follow eventually. In short, **don't just skim the surface. Dive deep.** The health of the lake depends on it! ### RHB Small Cap Jewel Get exclusive access to **Malaysia's top 20 high growth small-cap companies**, curated by RHB Research. Sign up [here](https://www.mrmoneytv.com/mmtv-faq-rhb-small-cap-jewel) to grab your copy of RHB’s 20th Anniversary Small Cap Jewels. *Subscribe to our* [*financial newsletter*](https://www.mrmoneytv.com/) *for the latest news, insights, and advice on personal finance, investing, and more. With every email, you’ll gather the confidence and knowledge to make informed decisions to achieve your financial goals.* ## Frequently asked questions ### How do you evaluate a company before buying its stock? Check five things: cash flow, gearing ratio, profit margin, shareholder activity, and macro conditions. Picture the stock as the shimmering surface of a lake and the company as the ecosystem beneath, so look past the daily price. Read the annual report's cash flow statement, compare profit margins with peers, watch how management steers the business, and follow the wider economy. A healthy company's share price follows eventually. ### What is a gearing ratio and why does it matter? The gearing ratio measures how much of a company's operations are funded by debt versus equity. A higher ratio can mean higher risk, such as the company being unable to repay debt, but also potential for higher returns if it is expanding. AirAsia carried a high gearing ratio in the past because its business is capital-intensive, so investors had to judge whether that debt was sustainable in the long run. ### Should I sell if a major shareholder is selling their stake? Not automatically. Don't panic assuming something is going wrong. Find out the true reason for the transaction first, because the shareholder might be selling their stake to a strategic investor that could bring the company to new heights. Monitor announcements on Bursa Malaysia and news reports about significant shareholding changes, since big buying or selling by top executives can signal a company's future prospects. ### How do you use profit margin to compare companies? Profit margin shows how efficiently a company converts sales into profit, so look for a business that maximises profit while minimising costs. A higher margin suggests better efficiency and control over costs. Compare a company's margin with its peers to see whether it performs at industry standards. A diversified company like Genting Malaysia Berhad has different margins across segments, which helps you see which parts drive its profitability. ### What macro factors affect a company's stock in Malaysia? The overall economic and political conditions, since companies don't operate in a vacuum. Track key indicators like GDP growth, inflation rate, and foreign exchange rates, and stay in touch with major events around the company. Malaysia's palm oil industry, for example, can be affected by international trade policies, currency fluctuations, and environmental concerns, so be aware of these before investing in firms like Sime Darby or IOI Corporation.