Check the price to earnings multiple and EPS

It's important to understand the EPS and its relation to the price to earnings multiple. Read more on EPS and P/E.

Remember higher the price to earnings multiple, the more you are paying for the stock. So, if two stocks from the industry are having two different P/Es, then you can say that one is more expensive than the other and may have to look at other parameters.

Check the 52-week high and low of the stock

Check if the stock is near its 52-week high or low. If it's at the lower end of the 52-week low, it's possible that the stock could rise. On the other hand avoid buying the stock if it is closer to its 52 week high.

Check the price to book value

Normally, a price to book value of 1 and 2 times is reasonable, beyond that the stock is expensive.

Check the promoter holdings

If the promoter holding is high, then the promoter himself has faith in the company. A holding in excess of 50 per cent is always good.

Check if the promoter shares have been pledged

If the promoters shares are pledged it's a sign that the company's cash flows are not healthy. It's best to avoid such stocks.

Check fancy of the industry

Certain sectors do not attract high price to earnings multiples. For example, the metals sector is less attractive for investors, then the FMCG sector. Therefore, the FMCG sector attracts a higher price to earnings multiple. This is because people are willing to pay more as they are recession proof.

Check if the stock is from a bellweather industry

Bellweather industry stocks are those from the pharma, FMCG and IT industry and are generally accorded higher valuations, because of their recession proof nature.

Of course, there are a whole lot of other things that one needs to check before buying a stock and it's almost impossible to highlight all. For example its's important to study cash flows , future expansion plans, regulatory risks, export and other risks etc.

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