When it comes to investing in stock market, picking the right stock is extremely crucial as one bad stock could ruin your entire portfolio. For new investors, picking the right stock can be difficult. Thus, here comes the strategy of value investing by Benjamin Graham, widely known as the father of value investing. An economist, professor and investor, Graham laid certain fundamental aspects to consider deciding on stocks to buy in his book ‘The Intelligent Investor’, first published in 1949.
The seven crucial criteria for picking the perfect stock for your portfolio include –
- Analyse the quality of the company:
As per Benjamin, the best companies to invest in are companies labelled as stable by S&P Earnings and Dividend Rating formula. This rating is mainly from A+ to C criteria. An average of B+ is mostly recommended to invest in. - Debt to Current Asset ratio:
If a company has a higher debt, it can prove challenging for the company to repay the amount. This, in turn, can lead to loss. Thus, it is advised to invest in companies whose overall debt does not exceed 110% of net current assets. - Current ratio:
This ratio measures the company’s short-term liquidity, comparing its current assets and current liabilities during a financial year. A company whose existing assets are more than its liabilities is always recommended as a good investment option. - Per share growth:
The share price in the graph of the company should show an upward trend in the last five years. It is also recommended to invest in companies that have no earnings deficit over the years. That means there should not be any accumulated losses of the company. - Price-to-Earnings ratio:
The PE ratio measures the current share price with the per-share earning. This ratio helps the investor understand how much the market will spend on the company’s share – based on previous records - Price-to-Book ratio:
This ratio compares the book value of the company to its current market value. This helps the investor to ascertain whether the price of the share is overvalued or undervalued. In this scenario, Graham recommended investing in companies with a P/B ratio of not more than 1:5. - Dividend history
A dividend is when the company distributes its profit among the investors as decided by the board of directors. Consistent dividend payout history over the years means that the company is generating good returns.
These seven rules could help investors to find the right companies that have shown stable growth and less risks over the years. Benjamin Graham had made these rules for investors who had low appetite for risk. Even today, these rules can act as a guide for investors looking for profitable stocks to invest in or just general investment advice.
