3 simple ways to select the right stocks with healthy returns.

When it comes to selecting stocks for promising returns, every analyst and investor has their own unique approach. My strategy involves meticulous analysis that not only ensures returns but, healthy ones.

Here's how I analyze stocks:
1. Understanding the Business Model: First and foremost, I ask myself if, the business model makes sense to me. Also, I try to understand how the company generates revenue.
2. Management Evaluation: Secondly, I examine whether the management team is actively contributing to the company's growth and operations and helping it flourish.
3. In-Depth Financial Analysis:

   Finally, I conduct an in-depth analysis on the company’s three financial domains. They are:

   • Income Statement:
     1. A gross profit margin exceeding 40%.
     2. Year-over-year revenue growth should be at least 7%, and positive EPS growth is a must.
     3. A net income margin of over 20% is a good sign.
   • Balance Sheet:
     1. When examining the #balancesheet, I check whether the current ratio between current assets and liabilities is greater than 1 or not. A greater than 1 ratio is considered good.
     2. The debt-to-equity ratio should be below 0.75. It is used to calculate the company’s financial leverage.
     3. A company's cash reserve should ideally exceed its debt.
     4. If, the company has a promoter holding of 55-60%, it is a good sign.
     5. Assessing interest coverage, which tells you if, the company is strong enough to pay any interest due on any outstanding debt.
     6. Check the asset turnover ratio as it will give you a clear picture on how well the company uses its assets to generate sales.

     These are some of the key metrics which reveal the health of the balance sheet.

   • Cash Flow Statement:
     1. A positive cash flow is of paramount importance. It offers insights about the company’s ability to efficiently generate cash and effectively manage its operations.
     2. Study the way the company strategically allocates its free cash: debt clearance, investments in Capex, share repurchases, or dividends.
     3. ROIC and ROCE should surpass 15% and 20% respectively.
     4. Examining the Free Cash Flow Yield, a key metric which reveals the valuation of the company.
   • Additional Checks:
     1. Assessing the main risks and understanding the competitors in the industry.
     2. What differentiates the company from its industry counterparts and industry growth prospects.
     3. Regularly reviewing the company objectives and future plans.
     4. Consider the macroeconomics and industry-specific factors that impact the company’s financials.

Remember: The key lies not just in picking stocks but in understanding the stories they tell through their financials and market context.

Invest your wealth strategically in companies that promise sustainable growth.