This is how you know if a stock is a buy

A lot of people buy stocks because it feels right and they think the company will be around for a while.

When you buy a stock you’re buying into the company therefore you want to look at several factors rather than just go with your gut, if you don’t look at the following factors then you’re better off buying mutual funds or index funds such as VOO and QQQ.

Let’s proceed:

1. Pull up the balance sheet for the last quarter, the last year and the last 5 years. Look at 2 categories, assets (money/money making investments)and liabilities (debt/long term expenses)

The total assets should be 2x or more of the total liabilities. The short term assets should also be about 1.5-2x the short term liabilities. If the balance sheet looks good move onto #2, if not move onto the next company.

THIS ALONE CUTS HALF THE STOCKS MOST PEOPLE “FEEL LIKE ARE A GOOD BUY”

2) Ok so you found a company with a good balance sheet, great! Now let’s look at the historical earnings, look at these for the past 10 years. Are the quarterly earnings growing steadily like you want them to be? Or are there huge peaks and valleys showing a more volatile company? Are they trending downwards showing the company is losing money consistently? Or are they flat/slowly growing showing a steady but boring company?

If the historical quarterly earnings over 10 years are steadily growing, that’s what you want. So move onto 3)…

3) now let’s look at the EPS, this is how much you’re paying for the earnings you receive. Lower is generally better, anything over 20PE is considered high. Look at Ford to see an extremely high PE showing an extremely overvalued company, even at $5 a share!

4) Does the company pay a dividend? This means the company pays you money, typically quarterly, to hold their stock. Not always necessary because a lot of high growth tech stocks don’t but you make a ton due to natural growth, but a dividend is nice.

This will get you started. If you don’t do this for every stock you want to buy then you’re just buying stocks based on emotion and what you “think” looks good on a chart, and you will lose money more often than not.

EDIT: I feel the need to say this is NOT a one size fits all, this is just a good way to find out the value of a company.

Amazon, Microsoft, Facebook, Google, Tesla, etc. do not follow this formula, but this can tell you how to price companies like airlines.