Arm yourself with basic knowledge so that you can make informed choices when investing. (Illustration: Vecteezy) 
Investing is not recommended as a do-it-yourself game and you should always seek proper financial advice, but you can also arm yourself with basic knowledge so that you can make informed choices.
Wendy Myers, head of securities at PSG Wealth, says understanding key financial metrics means you are better able to figure out how a company is performing financially. And if you review these metrics across a sector, you can also use the information to spot high-level, long-term trends rather than getting bogged down in intricate financial details.
“An earnings release shouldn’t trigger knee-jerk investment reactions. It is important to remember that there are many macroeconomic factors at play that impact the share price, but they have nothing to do with how a stock is intrinsically performing in its sector,” she says.
Warren Buffett famously said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” This buy-and-hold philosophy underpins the theory of long-term investing, emphasising that you need to be comfortable holding a stock through market cycles and not only for short-term gains.
Investors digesting financial results must interpret whether a company is performing poorly at its core. Understanding this is critical before making any moves to sell.
Company health checklist
Myers cautions that savvy investors should take note of a few red flags regarding company results. First, an earnings warning could signal that the fundamentals of a company are no longer solid. Second, the failure to meet analyst expectations for consecutive reporting cycles may indicate that deep structural issues are at play in the company. Finally, falling market share can suggest a company is not meeting the expectations of its clients.
Demystifying financial terms/h3>
Myers explains some of the financial terms you will come across and what they mean for you as an investor:
- Earnings per share: The go-to indicator for most investors, this metric indicates profitability on a per-share basis. It is a key indicator of the company’s financial health.
- Revenue growth: Consistent revenue growth is a sign of business expansion, signalling a healthy, growing business.
- Profitability: Gross profit margin shows how efficiently a company produces its product or service. Net profit indicates overall profitability.
- Return on equity (ROE): A good indicator to measure how a company uses shareholder investments to generate returns. If the ROE is higher than net profit, it suggests good use of shareholder capital and often a good management team.
- Liquidity: Looking at current ratios of assets to liabilities highlights a company’s ability to meet short-term financial obligations. If it is trending higher, it means increased liquidity, which is positive.
- Solvency: Debt-to-equity ratio highlights the proportion of debt in a company. In a rising interest rate cycle, lower debt is preferable. A high debt-to-equity ratio indicates higher risk because there is an overreliance on debt financing.
- Interest coverage: Indicates the ability of a company to cover its interest expense with its earnings — a good indicator of long-term financial health.
Lauren Jacobs, senior portfolio manager at Satrix, points out that media headlines drive the traditional, fear-based approach to investing. A political shift, a corporate scandal or a sudden market dip can trigger panic and the urge to act immediately.
However, she warns that a panic response is one of the biggest dangers for investors.
“When markets fall, the instinct to sell and cut losses is strong. However, history has shown this is often the worst possible move, as it locks in losses and causes you to miss the possibility of a rebound,” she says.
Stephan Bernard, an analyst at Allan Gray, adds that before making changes to your portfolio, you should consider whether your personal circumstances, investment goals or time horizon have shifted. If they haven’t, staying the course may be wiser.
“History shows that long-term value is often built by investing through uncertainty — not by reacting to it. Staying focused on your long-term strategy is key.” DM
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.
