Losses are the only guarantee in day trading. Still, a careful analysis of the market is critical if you hope to turn a profit. When analyzing a stock, consider the following methods.
Price-to-earnings (P/E) ratio
The P/E ratio of a company can give you insight into a company’s growth potential compared to competitors in the same industry. It is determined by the current trading value of a stock compared to its earnings per share over the past 12 months. A company with a current value 10 times its earnings would be seen as stronger than a competitor with a stock value of two times earnings.
Price-to-earnings growth (PEG) ratio
The PEG ratio can help you understand how a company might grow over the next year or two. It is determined by taking the stock’s P/E ratio and comparing it to the company’s expected earnings growth. The higher the PEG ratio, the higher the company’s growth potential.
A debt-to-EBITDA ratio can give you a sense of whether a company is a high-risk investment or not. A high debt-to-EBTIDA ratio suggests that the company’s debt is outpacing its earnings before taxes, interest, depreciation, and amortization. A lower debt-to-EBITDA ratio suggests a company might be less risky.
If you aren’t sure how to apply these approaches, identify two to three stocks you like based on their fundamentals (don’t overthink it) and track them over the course of a quarter. What happened, and did it surprise you? What did you notice about the stock values? What affected them? Keep notes.
After tracking these stocks, consider the most important fundamental factors. Consider these elements first when analyzing any stock.