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Analysts typically look at the company's cash flow to evaluate how much money the company spends, how much it brings in, and how much "free" cash is left after the bills are paid.
What makes a company a good investment? Investment professionals consider several factors when they're selecting companies to include in a stock portfolio. Here are some of the criteria they're likely to use.
A Company's Finances - A strong financial position on the part of the issuing company can make a stock attractive to investors. Analysts typically look at the company's cash flow to evaluate how much money the company spends, how much it brings in, and how much "free" cash is left after the bills are paid. Reviewing revenues, net income, and earnings per share helps analysts assess the company's history of sales and earnings growth. Another gauge of financial health is the amount of debt the company has compared to equity.
A Look at the Business - Stocks of companies that are leaders in their industries generally are desirable choices for a portfolio. Analysts look for profitable companies with limited competition whose products or services are valuable to customers. Keeping an eye on earnings estimates helps analysts determine whether the company is likely to experience rising profits or unexpected slowdowns in the future.
Valuing Stock - Analysts use different calculations to assess a stock's relative value. Some of the most common include:
The Personal Factor - While metrics are critical to analyzing a company's stock and whether it may be a good addition to an investor's portfolio, personal circumstances – e.g., an investor's other portfolio holdings, goals, time frame, and risk tolerance – should always be considered when determining whether a stock is right for a particular portfolio.
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