The Rationale for Choosing the Company in which to Invest
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The rationale for choosing the company in which to invest
The stocks to invest in should be easy to understand where the business model for the company is straightforward. If you know a specific industry and it is clear to you, but other investors find it complicated, these stocks are worth your investment.
The companies with well-established brands are the best to invest in, which are strong, and emerging. Stick to the brand that is highly admired and is worth your investment, and follow other strategies to make decisions. Stocks that perform well in history have a tremendous brand and attract many customers.
The stock for investment should have a history of good performance in the past. It does not have to be the best over the last year, but the chart of performance, in the end, should be convincing. Consider investing in stocks that give shareholders good returns and have made them rich. The reserve should have good performance for a very long period, and the record of accomplishment creates value for the shareholders.
Consider investing in mid-cap as well as large-cap companies, as well as avoid companies with small-cap names. The focus should be on companies with a history of paying dividends to the shareholders. Ensure that you invest in stocks from companies that pay quarterly dividends without failing, and the company should give maximum profits in the future (Brigham & Besley, 2011).
Primary reasons for stock selection
The current, as well as projected profitability of the stock, should be okay considering the earnings, cash flow, margins of operation, and financial fundamentals. These factors help to understand the financial health and likely profitability in the future. Investors consider the stability of earnings, the way they are trending, and consider higher margins of operations for efficiency.
The asset utilization should be favorable, which is revenue from each dollar of the company’s assets. The ratio of asset utilization measures efficiency, different industries using different proportions depending on how favorable they are.
The capital structure should be conservative in the way it funds the business operations using equity and debt. The company should create short-term liquidity, which is enough for costs of operation and save enough for financial expansion and not increase long-term debt.
The earnings momentum is paramount, where the current earnings and availability of many investors show where the company is at a specific time. Whether the growth of revenue is slowing or accelerating between different periods shows where the company is heading (Reddy & Zantye, 2016).
Client’s profile from Part 1
The reason why I choose P & G as a suitable investment for my client is that she is a financial analyst for a successful organization and understands how stock trades in the market at different times. At the Ford Motor Company where she works, she is among people who track the financial performance of the company, analyze markets conditions for forecasting as well as assisting the management with strategic decisions as well as preparing periodic reports. My client is a risk averter, close to retirement, and has some savings that she wishes to invest in a stock trading company.
Analysis of the past three years of the selected five financial ratios for the company.
The current ratio is dividing the number of latest assets by current liabilities. The current ratio of Procter and Gamble Company was deteriorating from 2018 to 2019. However, there was an improvement from 2019 to 2020 exceeding the level of 2018.
The quick ratio is a liquidity ratio calculated as cash, add marketable investments in the short term plus receivables then divide by current liabilities. The quick ratio of Procter and Gamble Company declined from 2018 to 2019 and became better from 2019 to 2020, outstanding the level of the year 2018.
Earnings per share are the net earnings of a company or losses accountable to common shareholders per share base, which are under dilution together with warrants, options, debts as well as convertible securities. At Procter and Gamble Company, 2018 annual EPS was $3.67, a 34.35% decline from 2017, 2019 annual EPS was $1.43, a 61.04% decline from 2018, 2020 annual EPS was $4.96, a 246.85% increase from 2019.
The Price-earnings ratio is the latest closing price divide by the most recent number of earnings per share. That is a simple way of assessing whether there is overvaluation or undervaluation of stock. The price-earnings ratio at Procter and Gamble Company on 31/12/2018 was 21.23, 31/12/2019 was 72.13, and 24/11/2020 was 26.45.
The cash ratio is the total cash assets (cash plus short-term marketable investments) divided by current liabilities. The cash ratio of Procter and Gamble Company dropped in the year 2018 to 2019 but refined from 2019 to 2020, reaching the level above 2018 (Reddy & Zantye, 2016).