You might have enough money in your hand to start investing in stock and generate more cash flow. But as financially capable as you are, you might be clueless the important things to consider in picking good stocks. Choosing stocks that worth investing is not as easy as picking any stocks from the stock exchange. Here are the three key financial ratios I used myself in evaluating stocks:

Minimum 10% Earnings per Share Growth Rate (EPSGR)

EPSGR is an incremental value of Earnings Per Share (EPS) at specified timeframe; which normally done on annual basis. Stock with the highest EPSGR grows the fastest in that year than the other competitor in the same industry. Consistently giving 10% EPSGR is a good indication that the company has excellent products with great demand and economies of scale. However, it would be better if you manage to find stocks with 15% EPSGR.

Minimum 10% Return on Equity (ROE)

Return on Equity (ROE) is a comparison of the company’s net profits to its shareholders equity. ROE tells you how much you can gain if you had decided to invest in the stock. Companies with more than 10 per cent ROE have the ability to utilise their shareholders’ money for maximum profits. You should not buy stocks that have ROE less than 5% as you can get the same return with zero risk with cash deposit. After all, what is the point of taking greater risk and yet get the same return?

Maximum 60% Debt to Equity Ratio (D/E)

D/E shows you how much debt the company is using to finance its business operation. You can calculate it by dividing the company’s total debt by the total number of equity. You will know if the company is heavily funding its operations from debt should its D/E is greater than 1. This will give you some picture to how sensitive the stock is from the rising interest rates. Nevertheless, there are capital intensive industries which require huge financing from others due to their business nature.

You must consider these key financial ratios altogether as they define just how much valuable your investment would be. Picking one with no business quality at all, just do not make any sense to me. But don’t forget to use some qualitative methods as well in finalising your stock picks. After all, picking good stocks requires homework and effort. Trust me, it is well worth it.

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