The launch of Elon Musk's SpaceX onto the stock market saw tens of thousands of Britons keen to acquire a stake, drawing attention to the practice of DIY investing. While buying shares in individual companies can offer rewards, it also presents risks, particularly as it often leads to investing in fewer companies compared to a fund, increasing exposure to individual company performance.
High-profile initial public offerings (IPOs) can often prompt this interest, with reports indicating that more than 100,000 individual UK investors applied for just under $1bn of SpaceX shares. However, before investing in individual companies, it is considered vital to conduct thorough research into a business's financial health, anticipated returns, and profitability to identify potential warning signs regarding its long-term prospects.
Jemma Slingo, a pensions and investment specialist at Fidelity International, suggests that examining data helps investors ask crucial questions, such as whether the price is reasonable and if shareholder returns are sustainable. However, she cautions that numbers cannot predict the future, and past performance is not a reliable indicator of future returns.
Key investment data points that can provide insights include the price-to-earnings (P/E) ratio, which compares a company's share price to its earnings per share. The average FTSE 100 company has a P/E of about 12, though what constitutes a 'good' or 'bad' number depends on the comparison. The price-to-book (P/B) ratio, which compares stock market value to assets minus liabilities, can indicate if shares are fairly priced, with a number below one suggesting undervaluation.
Return on equity (ROE) demonstrates how effectively management uses shareholder investments to generate profits. While many suggest a ratio of 15% to 20% is good, this varies by industry. Dividend yield, which shows dividend payouts as a percentage of share price, is useful for income-seeking investors, but a high yield could also signal sustainability concerns if not supported by earnings and cashflow.