Tips on Evaluating Stock Performance

By Laurel Tincher · May 25, 2023 · 9 minute read

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Tips on Evaluating Stock Performance

Evaluating stock performance is not an exact science, and there are many factors, indicators, and tools that investors have at their disposal. However, it can be easy to get overwhelmed by the amount of information, charts, and choices available. After all, no amount of analysis can truly make accurate predictions about stock performance.

With this all in mind, for most investors, using a few simple strategies to evaluate stocks can provide a good understanding in order to help make an investment decision. Every investor has their own goals, investing and diversification strategies, and risk tolerance, so it’s beneficial for each person to come up with their own stock evaluation strategy.

Evaluating Stock Performance

Stock evaluation can involve both quantitative and qualitative analysis. Quantitative analysis involves looking at charts and numbers, whereas qualitative analysis looks into industry trends, competing firms, and other factors that can affect a stock’s performance. Both forms of analysis provide valuable information for investors, and they can be used in tandem to come up with a comprehensive picture of performance.

Here are a few key steps investors can take to evaluate stock performance or analyze a stock.

Total Returns

One of the most important metrics to look at when evaluating a stock’s performance is the total market return over different periods of time. A stock may have increased significantly in value within the past few days or months, but it could still have lost value over the past year or five years.

Investors may want to consider how long they plan to hold a stock and look into each stock’s historical performance. Some common periods to look at are the past year (52 weeks), the year to date (YTD), the five-year average return, and the 10-year average return. Investors can also look at the average annual return of a stock.

Every investor has different goals and expectations for returns. One investor might be happy with a 3% return over five years, while another might not be.

Using Indexes

Another step investors may want to take to evaluate a stock’s performance is comparing it with the rest of the stock market. A stock might seem like an attractive investment if it has had a 7% return over the past 52 weeks, but if the rest of the stock market has increased by more than that, there might be a better choice.

A single stock can be compared to the overall stock market using stock indexes. Indexes show averages of the market performance of a handful or even hundreds of stocks. Index performance metrics show how any particular stock compares to the broader market. If a stock has been performing similarly or better than the market, it may be a good investment.

Looking at Competitors

An additional way investors might consider evaluating a stock’s performance is by comparing it to other companies within the same industry. One might discover that an entire industry is doing well in the current market, or that another stock within the industry would actually be a better investment. There are numerous industries and market sectors.

Not every company within an industry will be a good comparison, so it’s best to look at companies of a similar size, those that have been around for a similar amount of time, or that have other similarities. Even if a giant, established corporation offers a similar product or service to a small startup, they may not be the best two stocks to compare within an industry.

Two questions investors might consider asking are:

•   Does the company have a competitive advantage? If the company has a unique asset or ability, such as a patent, a new research or manufacturing method, or great distribution, it may be more likely to succeed within the industry.

•   What could go wrong? This could be anything from poor management to a new form of technology making a company irrelevant. Nobody can predict the future, but if there are any red flags it’s important to pay attention to them.

Reviewing Company Revenue

Looking at stock returns is useful, but it’s also a good idea to look into the actual revenue of a company through its profit and loss statement, or earnings reports. Stock prices don’t necessarily follow a company’s revenue, but looking at revenue gives investors an idea about how a company is actually performing.

Like stock returns, investors can look at revenue over different periods of time. Revenue is categorized as operating revenue and nonoperating revenue. Operating revenue is more useful for investors to look at because non-operating revenue can include one time events such as selling off a major asset.

Using Stock Ratios in Evaluations

There are several financial ratios that can be used to evaluate a stock and find out whether it is currently under or overpriced in the market. These ratios can help investors gain an understanding about a company’s liquidity, profitability, and valuation. Some of the most commonly used ratios are:

Price to Earnings (P/E) Ratio

The most popular ratio for evaluating stock performance is the price to earnings ratio, or P/E ratio, which compares earnings per share to the share price. P/E is calculated by dividing stock share price by the company’s earnings per share. It’s important because a stock’s price can shoot up based on good news, but the P/E ratio shows whether the company actually has the revenues to back up that price. One can compare the P/E ratios of companies in the same industry to see which is the best investment.

There are two different ways to calculate P/E. A trailing P/E ratio can be calculated by dividing current stock price by earnings per share. A forward P/E ratio is a prediction that can be calculated by dividing stock price by projected earnings.

Price to Earnings Growth (PEG) Ratio

P/E is a useful ratio, but it doesn’t take growth into account. PEG looks at earnings, growth, and share price all at once. To calculate PEG, divide P/E by the growth rate of the company’s earnings. If the PEG is higher than 2, the stock may be overpriced, but if it’s under 1, the stock may be underpriced.

Price to Sales (P/S)

The price to sales ratio is calculated by dividing the company’s market capitalization by its 12-month revenue. If the P/S is low in comparison to competitors, it may be a good stock to buy.

Price to Book (P/B)

The P/B ratio looks at stock price compared to the book value of the company. The book value includes assets such as property, bonds, and equipment that could be sold. Essentially, the P/B looks at what the value of the company would be if it were to shut down and be sold immediately. This is useful to know because it shows the value of a company in terms of assets, rather than valuing it based on growth.

If the P/S is low, the stock may be a good investment because the stock might be underpriced.

Dividend Yield

Dividend yield is calculated by dividing a stock’s annual dividend amount by the current price of the stock. This gives investors the percentage return of a stock’s price. If the dividend yield is high, this means an investor may earn more cash from the stock. However, this can change at any time so isn’t a good long-term indicator.

Dividend Payout

The dividend payout ratio tells investors what percentage of company profits get paid out to shareholders. Companies that don’t pay out dividends or pay low dividends are likely reinvesting their profits back into the business, which could help the business continue to grow. Paying out dividends isn’t a negative thing, but if a company pays out high dividends they will have less money to reinvest and may not be able to continue to grow.

Return on Assets (ROA)

The ROA ratio compares a company’s income to its assets, which gives investors an indicator of how they handle their business.

Return on Equity (ROE)

ROE provides a calculation of how much profit a company makes with every dollar that shareholders invest. To calculate ROE, divide a company’s net income by shareholder equity. This gives an indication of how a company handles its resources and assets. However, as with every calculation, ROE doesn’t always provide a full and accurate picture of a stock’s performance. Companies can temporarily boost their ROE by buying back shares, which lowers the amount of equity held by shareholders.

Profit Margin

Profit margin compares a company’s total revenues to its profits. If a company has a high profit margin, this shows that a company is good at managing expenses, because they are able to keep revenue rather than spending it.

Current Ratio

The current ratio is calculated by dividing a company’s current assets by its current liabilities. This shows if a company will have enough money to pay off its debts. Current assets include cash and other highly liquid property. Current liabilities are any debts that a company must pay within one year.

Earnings Per Share (EPS)

This ratio is just what it sounds like, how much profit is a company generating per share of stock. A high EPS is a positive indicator. It’s a good idea for investors to look at EPS over time to see how it changes, because EPS could be boosted in the short term if a company has cut costs.

EPS is also useful for comparing different companies, since it gives a quick indication of how well each stock is doing. However, EPS doesn’t give a full picture of how a company is doing or how they manage their money, because some companies pay out earnings in the form of dividends, or they reinvest them back into the business.

Debt to Equity Ratio

Even if a company is growing and earning more profit, they could be doing so by getting into more and more debt. This could be a bad sign if they become unable to pay back their debts or if borrowing becomes more difficult. An ideal debt equity ratio is under 0.1, and over 0.5 is considered to be a bad sign.

Additional Factors

Aside from all the tools above, there are other factors to consider when evaluating a stock.

•   Dividends: If a stock pays dividends, investors may want to consider how those payments affect the overall returns of the stock.

•   Inflation: Factoring in how much inflation will affect stock returns is another helpful factor. This can be done by subtracting inflation amounts from a stock’s annual returns.

•   Analyst Reports: Another resource available to investors is Wall Street analyst reports put together by professional analysts. These can give in-depth insights into the broader market as well as individual companies.

•   Historical Patterns: Looking at past trends to get a sense of what the market might do in the coming months and years can help investors make informed decisions. Past trends aren’t predictions for the future, but they can still be useful.

The Takeaway

There are many tools available to help investors who are just getting started researching stocks and building a portfolio, and there’s no right or wrong way to evaluate stock performance. It can take a lot of time to gather information and research stocks, but investors can use tools to see everything at once and make quicker, more informed investment decisions.

If you’re ready to put your evaluation skills to the test, you can start investing in stocks and other securities to see if you’re on-point. But be aware that investing always involves risk.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

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