Looking for stock market nuggets? Here are 2 ways to find them

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When I was new to investing, I based most of my decisions on historical stock price performance. If a stock jumped in value, I would buy it. If he fell, I would ignore him. This momentum-based style of investing was not necessarily bad. However, I now use a multitude of different indicators to help me find pearls in the stock market. Here are some of my current favorites.

Low debt ratio

The debt ratio simply examines whether a company has more debt than assets, or vice versa. A figure above 100% is bad because it suggests that the company has more debt than assets. The problem with that at the moment is that rising interest rates make debt more expensive. To take out more loans, the interest charges are going to be high.

In another way, a high ratio is not good at a time when the global economy is slowing down. If there ever was a time when you had little debt on your balance sheet, this is it!

Therefore, to find good opportunities, I look for stocks that have manageable or low ratios. For instance, Shell currently has a low debt ratio of 43.46%. I’m not worried here that the company is struggling with that, which makes me attractive to consider buying.

Good cash flow and liquidity

This may seem like a boring point to focus on. However, I think it’s a real differentiator between mid stocks and big stocks right now.

One metric I can look at is the current ratio. This simply divides current assets by current liabilities. A number greater than one indicates that the company has enough current assets to provide cash to cover any expected liabilities. If the number drops below one, it should start sounding the alarm. In the tough trading environment, I don’t want to be stuck with a stock that has cash flow issues.

Different industries have different standards, so I have to be careful when comparing ratios between different areas. But let’s take the example of pharmaceuticals. GSK has a current ratio of one. As for Astra Zeneca, the ratio is 1.38. It may not seem significant, but it can make a big difference when you’re talking about several million pounds.

I call this discovery a hidden gem because most investors wouldn’t notice that GSK could be strict about cash flow management. I’m not claiming that this is going to be a real problem for the company. But if I want to buy a big pharma stock, AstraZeneca would be my safest option.

Doing my stock market homework

I try to do my research on a variety of areas before making a decision on what to buy. If I can find a stock with a low debt ratio, good current ratio, and other green lights, I’m in business. Of course, I cannot use a single indicator in isolation. But by knowing what I’m looking for, I can hopefully avoid costly mistakes.

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