Evaluating Facebook Further

By | June 8, 2020

Here is a video I recorded to show you other ways you can evaluate a stock on MSN:

The rules of thumb I use to evaluate whether a stock would be one I want to buy are as follows:

Cash Position – Current ratio greater than 1

Current ratio is how much cash a company has as compared to their current liabilities. Greater than 1 means that the company can pay it’s bills for the next year.

A larger current ratio may mean that the company needs to put it’s cash to work. Either pay dividends, buy back shares, invest in another great business, or create something new that will make substantially more money than invested.

Consistent Profit Growth

A company that shows consistent profit growth will also show share price growth. I like 25% to 50% profit growth; depending on the company you can live with less.

If you are looking at an unprofitable company you want to look at revenue growth. You also want to make sure the company will show a profit in a small number of years.

Return on Equity more than 20%

Return on equity shows equity growth over the previous year. That shows real gain in equity dollars that should translate to share price gain. This measurement could be checked for the past 2 or 3 years.

No Debt

My preference would be to buy shares in a company that has no long-term debt. I have been somewhat flexible but I expect the company has a way to pay off its debt obligations

Product Barrier To Entry

It should be difficult for other companies to produce a similar product.

Future Projections of Profit Growth

Most companies produce forecasts of profit into the future. The projections should show good growth.

Management Team That Values Shareholders

The management team should show they value shareholders in the long term and operate the company profitably and effectively.

In addition to these rules of thumb, I want to make sure I am not overpaying by calculating discounted net present value.

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