To: Manuel Rodriguez
From: Investment Manager
Subject: Investment decision
Date: December 17, 2021
I performed due diligence in three companies that might interest you as you aim to invest in stocks. I analyzed three companies the Bank of America, Verizon Communications, and Nike Inc. Certain critical factors determine the best type of stock to buy. These include; dividends, debt to equity ratio, and revenue growth.
Dividends are payments made by companies to their shareholders for holding their stock. Dividends are usually a distribution of profits; thus, a company that pays dividends shows stability and steady growth. An investor should check if a company has been paying dividends analyzing whether the payments have been consistent over the years. However, an investor should take caution of companies with high yields since it highlights the desperation of a company to attract investors or retain high incomes to shareholders (Beattie, 2021). In addition, high dividends highlight the company’s disinvestment strategy, which may lead to reduced earnings in the long term. All the analyzed companies paid dividends.
|Bank of America Corp||6,895||5,934|
The above table shows the dividend comparison between the three companies. The best company to invest in is Nike Inc. since its dividends increase each year and are relatively fair, indicating it invests its surplus. On the other hand, Verizon Communications has a very high yield, which shows the company has a disinvestment strategy, leading to reduced earnings in the long term. Finally, Bank of America Corp. has a moderately high yield which is shrinking, thus not a viable investment.
Debt to Equity ratio
I also analyzed the companies’ capital structure to determine the degree to which each company finances its operations through wholly-owned funds versus debt. I analyzed this metric using the debt to equity ratio, which measures a company’s financial leverage. The debt to equity ratio is calculated by dividing total liabilities by shareholder equity. All companies have liabilities indicated on the balance sheet, but the assets should be more than liabilities to show stability. A high debt to equity ratio indicates high-risk investments, particularly during tough economic conditions. Therefore, it is preferable to choose a company with a debt-to-equity ratio of below 2 since it presents a low risk (Likos, 2020). In addition, it shows the company’s capital generates adequate liquidity to cover short-term liabilities while reserving capital for expansion without increasing long-term debt. The three companies’ debt to equity ratio compares as follows; Verizon Communications has 3.5, Bank of America Corp has 9.3, and Nike Inc. has 1.95. This shows Nike has the best conservative debt structure and low-risk investment while Bank of America Corp is the highest risk investment.
I have also analyzed the companies’ earnings momentum as it is indicated whether a company is growing or declining. This is done by checking each company’s revenue and earnings over time, primarily comparing current and previous earnings. First, an investor should look at the trends and determine whether the company is growing at a favorable rate by gauging where the company was or is at a given time (Robinson, 2018). Acceleration of earning’s growth is a positive indicator for a good stock as it promises earnings in the immediate future. In addition, continued positive earnings indicate the stability of a company. The table below shows the companies’ comprehensive earning’s momentum.
|Comprehensive Income (Dollars)|
|Bank of America Corp||24,231||33,008||–|
All companies’ comprehensive income has increased steadily, showing that the companies are stable.
The best company to invest in is Nike Inc. since its debt to equity ratio indicates the investment is low risk. In addition, the company pays fair dividends; thus, an investor earns income quarterly.
Beattie, A. (2021). The 4 Basic Elements of Stock Value. Investopedia. https://www.investopedia.com/articles/fundamental-analysis/09/elements-stock-value.asp
Likos, P. (2020). How to Pick Stocks: 7 Things All Beginner Investors Should Know. U.S. News & World Report; U.S. News & World Report. https://money.usnews.com/investing/investing-101/slideshows/how-to-pick-stocks-things-all-beginner-investors-should-know?slide=2
Robinson, D. (2018). Five criteria to consider when selecting stocks. CNBC; CNBC. https://www.cnbc.com/2018/09/18/5-criteria-to-consider-when-selecting-stocks.html