Solid Fundamentals The Key To A Growth Stock

An investor should never buy a stock without examining a company's fundamentals. Fundamental analysis involves diving into a company's balance sheet and income statement to see if its financial situation is sound and improving.

i. Stick with companies that will grow:

There's only one reason to buy a stock: so you can sell it later for more than you paid for it. To do that, most investors want to stick with companies that will grow. In other words, when you sell your company you want it to be more profitable than when you bought it.

ii. The key fundamental measure is earnings per share, or EPS:

Most investors judge a company's growth by comparing each quarter's EPS to the EPS of the year-ago quarter. The concept of EPS leads to another measure of a stock: price-earnings, or P-E, ratio. A stock is considered "cheap" if it has a low P-E. But studies have shown that P-E ratios have little to do with a stock's future performance.

iii. Study sales growth of the company:

Investors looking closely at companies study not only earnings growth, but sales growth to see if the company is growing its earnings because it is selling more of its products and services.