In the long term, stocks deliver significantly better returns than overnight or fixed-term deposits. Which stocks to buy?
It is clear to every saver nowadays that, unfortunately, he will not achieve any great success with interest on overnight and fixed-term deposits. If you want to build up wealth in the long term, you can no longer avoid stocks.
In the long term, stocks deliver significantly better returns than overnight or fixed-term deposits. An investment in the German stock index (DAX) would have made an average profit of 8.5% per year if bought at the end of 1980 and sold at the end of 2018. In the short term, you can be lucky or unlucky on the stock market. Share prices rise and fall. But in the long run, investing in stocks has always been successful. Familiarize yourself with stocks!
But the key question is which stocks to buy?
One often hears from friends or colleagues “You have to buy the X share. The course will soon explode ”. You turn on the television in the morning and a stock expert announces: "Today stock Y is a buy recommendation from our point of view".
Is it understandable and understandable for you why these stocks are recommended for purchase?
To make the decision a little easier, there is publicly available company and market data. This objective data will help you understand whether a company is healthy and well rated. The form of analysis is also called fundamental analysis and uses different key figures. The key figures are based on business data and consider the economic environment of a company.
Key figures simply explained
Let me introduce you to 12 metrics that we use to value stocks.
1) Return on Equity
Definition
Return on equity is the ratio of a company's profit to equity. As a rule, the net income of the last year reported is used for the calculation.
Significance for the evaluation
The higher the return on equity, the more economically a company operates. A high return on equity can be seen as protection against bad times.
We rate a return on equity of more than 15% as positive.
Calculation
Return on equity in % = (net income / equity) * 100
Example
Lufthansa (on April 16, 2019): return on equity = (2,196 million / 9,573 million) * 100 = 22.94%
2) Equity ratio
Definition
The equity ratio describes the share of equity in the total capital (equity + debt) of a company.
Significance for the evaluation
The equity ratio is an indicator of a company's creditworthiness. A high equity ratio reduces the risk of insolvency and, conversely, means lower debt.
We rate an equity ratio of more than 25% as positive.
Calculation
Equity ratio = (equity / total capital) * 100
Example
Lufthansa (on April 16, 2019): Equity ratio = (9,573 million / 38,215 million) * 100 = 25.05%
3) Profit Margin
Definition
The difference between a company's costs and revenues is known as its profit margin. I use the operating profit margin for my valuations. A company's earnings before interest and taxes are expressed in relation to sales. The operating profit margin is also called EBIT (Earnings Before Income and Taxes).
The profit margin is therefore a measure of return on sales: the higher the margin, the better off a company is - and the sooner it can cope with higher costs or lower prices.
Significance for the evaluation
The pre-tax profit margin expresses how profitable a company is. A high margin is a sign of high profitability. Inexpensive manufacturing companies can achieve higher margins more easily than companies with a high cost pool. Note: This metric is not applicable to financials as their business models are based on the handling of debt.
We rate a pre-tax profit margin of more than 12% as positive.
Calculation
Pre-tax profit margin in % = (EBIT / sales) * 100
Example
Lufthansa (on April 16, 2019): Pre-tax profit margin = 7.81%
4) Current price-earnings ratio (P / E)
Definition
The price / earnings ratio describes the relationship between the current share price and the annual earnings per share. This shows how many years it takes a company to generate the value of its shares as a profit. The P / E relates to the forecast earnings per share for the coming year.
Significance for the evaluation
The P / E ratio is an important key figure for assessing the earning power and earnings development of a company in comparison to other companies. The lower the P / E ratio of a share, the cheaper the share appears. Low P / E stocks have historically generated higher returns.
We rate a P / E ratio of less than 12 as positive.
Calculation
Price / earnings ratio = share price / earnings per share
Example
Lufthansa (on April 16, 2019): current PER = 12.07
5) Average P / E over the last 5 years
Definition
The average price-earnings ratio over 5 years expresses how the current price of the share and the average annual profit per share relate to one another over 5 years. The reported figures from the past 3 years as well as the expected figures for the current and the next year are used.
Significance for the evaluation
The P / E ratio is an important key figure for assessing the earning power and earnings development of a company compared to others. Using the 5-year average helps even out fluctuations.
We rate an average PER over 5 years of less than 12 as positive.
Calculation
P / E ratio over 5 years = share price / ((profit 3 years ago + profit 2 years ago + profit 1 year ago + profit current year + expected profit next year) / 5))
Example
Lufthansa (on April 16, 2019): PER over 5 years = 5.21
6) Price change in the last 6 months compared to the index
Definition
Percentage by which the share price has changed in comparison to the index in the last 6 months.
Significance for the evaluation
The key figure shows an upward or downward trend in the share in the last 6 months. The development of the share is related to the index (market average) in order to see whether the share has performed above or below average.
We rate a price change of more than 5% in the last 6 months compared to the index as positive.
Calculation
Price change in the last 6 months compared to the index = price change in the share in the last 6 months - price change in the index in the last 6 months.
Example
Lufthansa (on April 16, 2019): change in the share + 9.03% - change in the index + 2.07% = + 6.96%
7) Price change in the last 12 months compared to the index
Definition
Percentage by which the price of the stock has changed in comparison to the index over the past 12 months.
Significance for the evaluation
The key figure shows an upward or downward trend in the share over the past 12 months. The development of the share is related to the index (market average) in order to see whether the share has performed above or below average.
We rate a price change of more than 5% in the last 12 months compared to the index as positive.
Calculation
Price change in the last 12 months compared to the index = price change of the share in the last 12 months - price change of the index in the last 12 months.
Example
Lufthansa (on April 16, 2019): change in the share -22.41% - change in the index + -3.00% = -19.41%
8) Price momentum
Definition
The price momentum shows whether a stock is changing from a falling or constant trend to an uptrend or from a rising or constant trend to a downward trend.
Significance for the evaluation
The price change of the last 6 months is compared with the price change of the last 12 months in order to determine an upward or downward trend. In the case of an upward trend, the share rose faster than the index in the last 6 months and significantly more than the price change of the last 12 months.
We rate a change in the course in the last 6 months by more than + 5% and a course change in the last 12 months of less than + 5% as positive.
Calculation
The course change score in the last 6 months compared to the course change score in the last 12 months.
Example
Lufthansa (on April 16, 2019): Course change in the last 6 months: + 6.96%; Course change in the last 12 months: -19.41% -> positive evaluation
9) Expected earnings growth
Definition
Compare the profit estimate for the next year with the profit estimate for the current year.
Significance for the evaluation
A higher profit estimate for the next year indicates a positive business development.
We rate expected profit growth of more than 5% as positive.
Calculation
Expected Earnings Growth = (Earnings Estimate Next Year - Earnings Current Year) / Earnings Current Year (in %)
Example
Lufthansa (on April 16, 2019): Expected profit growth = (3.00 - 4.58) / 4.58 * 100 = -34.50%
10) Change in profit estimate
Definition
Change in profit estimate in the current year or next year compared to the value 4 weeks ago.
Significance for the evaluation
Profits are estimated by analysts. If the earnings estimate for the current or the next year is changed, analysts expect a positive or negative development of the share.
We rate a change in the profit estimate of more than 5% as positive.
Calculation
Change in profit estimate = (current profit estimate - profit estimate 4 weeks ago) / profit estimate 4 weeks ago (in percent)
Example
HeidelbergCement (on April 16, 2019): (5.95 - 5.60) / 5.60 * 100 = 6.25%
11) Reaction to quarterly figures
Definition
Public companies publish their quarterly report every quarter. On the day the figures are published, the percentage development of the share is compared with the development of the index.
Significance for the evaluation
If the share rises more than the index on the day the quarterly figures are announced, the figures are rated positively by the market. If the share falls more than the index, the numbers are rated negatively.
We rate a change in the quarterly figures by more than 1% compared to the index as positive.
Calculation
Reaction to quarterly figures: Change in the share on the day of publication - Change in the index on the day of publication
Example
Lufthansa (on April 16, 2019): Reaction to quarterly figures on March 21, 2019 = + 0.49% (change in share) - -2.02% (change in index) = + 2.51%
12) Course-to-book ratio (KBV)
Definition
The ratio is calculated by dividing the current share price by the book value per share. The book value is calculated from the property (machines, buildings, computers) minus the debts of a company. The book value corresponds to the actual value of the company.
Significance for the evaluation
The KBV indicates whether the stock exchange price is higher or lower than the actual value per share. With a P / B below 1, one could theoretically buy the company for less money than it is worth according to the balance sheet.
We rate a KBV of less than 1.5 as positive.
Calculation
Price to book ratio = price of the share / equity per share
Example
Lufthansa (on April 16, 2019): KBV 0.93
And now? - What stocks to buy?
The data for the above key figures can all be found on the Internet. This enables you to get an idea of whether a stock is well-rated. However, it is a bit tedious to compile the data regularly.
TransparentShare was developed to make it easier for you to find the key figures. You get the data at the push of a button. The key figures are determined automatically every day after the market closes. TransparentShare even informs you by email whether a share has been calculated as a buy recommendation.
Everyone has to decide for themselves whether they want to invest in stocks. Shares always involve risks. But they also offer great opportunities. Especially for long-term investors, stocks should definitely be an integral part of the investment portfolio.
It's not that difficult and time consuming. It's actually really fun! Without looking into it, however, it won't work. No matter how you invest your money, you have to invest time and acquire basic knowledge yourself. When you're ready, don't wait any longer.
If you are unsure whether a stock that has been recommended to you is really a buy recommendation, then take a look at www.transparentshare.com stop by and get an idea for yourself.
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