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  • Mr Money TV

How To Evaluate A Company and Their Stocks (2024)

Updated: May 24

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?


How To Evaluate A Company and Their Stocks 2023
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

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

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!


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