Tea with Solace: Valuation, PER and Value Trap (Part 2).

In order to study sustainability of earning, I have learned to identify the economic moats of company. Successful growth companies should still be profitable in the years ahead.

Recommended Reading:

The Five Rules for Successful Stock Investing, Chapter 3

To study the qualities of earning, I tend to look at whether a company is well managed with growth prospect. I sometimes refer to Philip A. Fisher 15 investments points as guide. I check whether a company has worthwhile profit margin? Does the management have the determination to continue to develop products or processes that will still further increase total sales potentials?

Recommended Reading:

Common Stocks and Uncommon Profit, “Fifteen Points to look for in a Common Stock”


I look for a stock that has a higher earning yield compare to a lower one. Businesses that return a high return of capital are better than businesses that earn a low return on capital.

Points taken from

The Little Book That Beats the Markets

Making sure that a company is in good financial health without excessive bad debts is another thing I pay close attention to.

Recommended Reading:

The Little Book of Value Investing, Chapter 11 -14

 

Finally, if analyzing individual company is really too challenging and tiring. We can just try to buy the whole basket of stocks that track the index. Exploring the idea of investing in index fund can also be rewarding in the long term.


Recommended Reading:
The Little Book of Common Sense Investing

 

Learning to identify truly undervalued companies with good fundamentals while avoiding value traps is truly a skill that will take time to master. This is a huge topic which can be further discussed in the future.

Read Part 1: here.

Read other guest blogs by Solace:
Tea with Solace.