Anything new and unfamiliar can appear complicated and daunting, leading to hesitation and anxiety. When it comes to investing, this is no exception.

Here are four simple steps for beginners on how to assess companies they might someday be interested in investing in. Of course, these are very general pointers; it’s crucial to arm yourself with knowledge by reading and learning as much as you can, and engaging with experienced investors, whether in person or through resources available online.

1. Can you explain, in the simplest terms, what the company does?

Knowing what a company does and being able to explain it in the simplest terms is a crucial starting point. Do a Google search of the organisation and go to its corporate website. The information you need is usually found in the “About Us” or “What We Do” section.

Ask yourself:

• what do they sell?
• how do they make money?
• why would I buy their products or services?

Keep your answers simple and in layman’s terms. If a child can understand your answers, then you’re on the right track.

2. Look at revenue and profit

Revenue is how much money the company gets from clients or product sales. Profit is how much is left after it pays for all expenses.

Think of revenue as your salary, and profit as what remains at the end of the month after you have paid for everything you need.

You can find this information in a company’s financial or income statement, which can usually be obtained through a Google search. Typically, five years’ of financial data are shown.

To identify whether a company has been doing well, you want to see a positive trend across the years when it comes to its revenue and profit. Look for the terms “net profit after taxes” or “net income”.

3. Understand price-to-earnings ratio (PER)

• Price-to-earnings ratio (PER) = share price divided by earnings per share

Everyone is attracted to discounts – but do they really offer a good deal, or are they reflective of a bad product?

This is where PER comes in. At its most fundamental level, it’s an indicator as to whether a bargain is a bargain.

Earnings per share basically refers to a company’s profit divided by how many shares it has. Typically, PER is about 15 times for a “normal” company, which means the current share price is 15 times higher than the earnings of the company in that given year.

A PER that is about 7.5 times would be the equivalent of getting about a 50% discount on the stock’s share price. A PER that is 22.5 times would mean it is about 50% more expensive to buy that stock.

Ask yourself: why is the stock cheap? Is it because no one is paying attention to it? Or is the company simply not a good one?

You would need to do further research to get these answers, but in general, understanding PER can help you identify low stocks to narrow down your options.

4. Use dividend yield

• Dividend yield = dividend divided by share price

Imagine you own a house worth RM500,000 and receive rental of RM24,000 annually. This translates to an approximate 4.8% (RM24,000 / RM500,000) return for the year.

By calculating dividend yield, you can see your potential returns more clearly. For example, if a company’s share price is RM5 and its dividend is RM0.50, this translates to a yield of 10% (RM0.50 / RM5).

The higher the dividend yield, the better – but that’s not all you’re looking for. By analysing a company’s dividend history and identifying those that consistently pay, you can better ascertain whether you might receive a steady stream of income.

Finally, do consider that steady income in smaller amounts might be better than higher, riskier returns. Good luck on your investment journey!

This article was written by Su-Wei Ho for MyPF. To simplify and grow your personal finances, follow MyPF on Facebook and Instagram.