5 Simple Value Investing Hacks: A Cheat Sheet for the Absolute Beginners

It feels nice.

When you have millions of dollars in your account, a Porsche in your garage, and time to spend with your family.

But with three children in school, a spouse at the house, and a nine-to-five job that sucks, it all seems like a dream.

So, in search of a get rich ordeal you’ve tried your hands on intraday trading but that taught you a lifelong lesson to never get back to the stock market.

But what if I told you that there’s another way, that’s not as quick as intraday trading but the returns are like winning a jackpot. Well, that’s catnip.

Yes! Here it is. Drumrolls, please.

Value investing in stock market is one of the best ways to make money while you sleep, it’s the most legitimate and proven way to beat inflation and triple your income over time.

Here are 5 tools to value investing like a pro.

1: Price-to-Earning Ratio

Until you don’t know the company’s growth prospects, you’re taking a gamble on it.

Companies have different growth prospects and selecting the best from the pool of thousands is downright difficult.

And to save you from those fatal mistakes you can use the p/e ratio to find the best growth company out there.

A p/e ratio compares the company’s share price with its total earning per share and shows how much an investor is willing to pay for a unit dollar of the firm’s earnings.

A high ratio shows that shareholders are happy to pay a higher price for a single company’s share because of growth expectations in the future.

For example, a p/e ratio of 10 means that the investors are willing to pay $10 for $1 in future company’s earnings.

2: Debt-to-Equity ratio

The debt-to-equity ratio measures the total debt that a company has against its total assets.

It shows how much a company has borrowed from outside sources other than shareholder’s equity.

Companies raise funds from outside sources such as banks and other credit institutions.

Though debt funding is a cheap source of funds, the risks that are associated with it are adverse.

However, companies like oil & gas, and telecommunication require more funds for the ongoing operations.

A high Debt-to-Equity ratio shows that most of the company’s operations are done through borrowed income, or the company has more debt as compared to its total assets.

That’s why firms having a high debt-to-equity ratio are considered riskier investments.

As a rule of thumb, a ratio of above 1.0 is considered a good investment, but if the number goes above 2.0 then it’s like a red zone and you shouldn’t spend a penny in it.

3: Return on Equity (Roe)

Return on Equity is a ratio used by financial analysts to measure the financial performance of the company.

It shows how efficiently the company uses its shareholder’s money for generating profits.

Returns differ from industry to industry, but if you find firms with roe between 15–20% then they’re worth checking.

Study the returns of other firms in the same industry, and compare your potential company with them.

And if the peers handle the shareholder’s equity more efficiently, then do a little dig-up and find reasons for your potential venture’s failure in the same area.

Suppose that, there’re two similar-industry companies one having 12 roe while the other possesses a number 10.

In this respect, you can investigate the latter firm’s past roe trends, and see if the ratio is gradually increasing or decreasing or there’s a sudden fall in profits.

4: Dividend yield

If the company is making enough profits, then the shareholders should be compensated.

The dividend yield is a parameter used in the fundamental analysis to determine the percentage of the company’s total earnings that go out as dividends.

A high dividend yield is considered a better buy, but as the pay-out rises, the share price falls and vice versa.

So, its better to invest in old ventures that have a reputation in the market and pays out a consistent dividend rather than some newbie corps.

Companies like Annaly Capital Management Inc. (NLY), New residential investment Corp, and Equitrans Midstream crop’s dividend payout rate is better than new companies and they’re trusted too.

Though, the dividend yield varies according to the market conditions, a yield between 2–6% is considered a good buy.

5:Current Ratio

While the debt to equity ratio shows the overall debt status of the company, the current ratio tells its short-term debt story.

The current ratio is also known as the working capital ratio which takes into consideration a company’s short-term assets and liabilities.

It shows how healthy a company is in eliminating its short-term debts with its current assets.

To find out the company’s health in eliminating the short-term debts you need to compare its current ratio to its peers.

If the company’s current ratio is slightly higher than its peers, or equal to them then, it means that the company is healthy enough to invest in.

However, a current ratio of less than 1 is a riskier investment.

As a rule of thumb, a company with a current ratio between 1.2–2 is an investable instrument.

Conclusion

Many people put half of their life savings in the stock market based on a lousy recommendation of their friend, relative, or spouse.

But, not you.

You’re equipped with the best tools and now you’re ready to make your first investment decision.

And I believe that you’re going to use all tools mentioned above and find the best companies out of the thousands listed in the stock exchange.

So stop staring at the screen, open up a new tab and find the best companies, now it’s your turn.