The Beginning Investor's Kit

Before you invest in any stock, first look at key numbers to assess the company's financial strengths and weaknesses.

Financial pros consider these numbers essential in the fundamental analysis of a stock. Apply each measure listed below to your prospective stock to size up your financial opportunity.

Earnings per share growth: Earnings per share is a number investors and analysts count on: it's the company's net income (minus taxes and preferred-stock dividends) divided by the number of common-stock shares outstanding. It measures the company's bottom line for that particular quarter or year. A company's growth rate is often calculated in earnings growth. When investigating a stock, look for a company with a strong record of rising earnings in successive quarters and successive years.

Price to earnings (P/E) ratio: P/E is a popular and useful tool for measuring a company's relative value. The P/E lets investors gauge how cheap, expensive, or fairly valued a stock price is. To find the P/E for your company, simply divide the current price of the stock by its annual earnings per share. Compare that number to the P/E of the stock in past years, of other companies in its industry, or of the market in general. The goal is to buy a company with good fundamentals and the lowest possible P/E compared to these other benchmarks.

Dividends: Don't forget to factor in dividends to calculate a stock's total return. Dividends are often a forgotten item until the next market downturn, when it can be a reliable source of income. Compare the stock's total return including dividends to the return from other investments. In addition, "look for a company with a history of raising its dividend. That's a strong signal of growth," says Mark Motley, a financial planner with Foster & Motley in Cincinnati.

Debt to equity ratio: Debt can weigh down a company--the more debt a company has, the less it has to grow the company or pay dividends. The debt to equity ratio is used to measure a company's debt. It is calculated by taking the company's long term debt and dividing by it total equity. Most companies carry debt, so it's important to compare this number to its competitors to gauge how much debt is acceptable. In general, look for low debt.

Return on equity (ROE): ROE is the company's net income expressed as a percentage of its book value (assets minus liabilities). It measures how well the company is managing its stockholders' stake. Compare the company's results over several years and with other companies in its industry and look for trends. If your company's ROE is lower than that of its competitors, the company probably isn't being managed as well as it could be.

Volatility: Because what a stock has done in the past will not predict what it will do in the future, examining volatility is as good an indicator of a stock's risk as there is. Beta measures a company's stock price volatility relative to the market, in most cases the Standard & Poor's 500 stock index. A stock with a beta of 1 mirrors the index. If a stock's beta falls below 1, then it is less volatile then the S & P 500 (but it's also assumed it will not gain as much either). Conversely, a beta of more than 1 means the stock is more volatile than the S & P 500 (and offers more return).

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