What I look for when searching for shares to buy

Finding shares to buy can be a complicated process. But investors can make it a lot easier by sticking to two key rules. In my own analysis, I follow these religiously. And I think they apply just as well to investors at any age and stage.

The numbers

When it comes to investing, numbers matter. They’re how we measure returns and investors can’t afford to ignore them. Rolls-Royce (LSE:RR) is a good example. The stock’s up 916% in five years and the underlying business has done incredibly well.

Has the share price gone too far, or could it still have further to go? It’s impossible to tell without looking at some numbers. Rolls-Royce has an enterprise value of £105bn. So to generate a 9% return for investors, the firm needs to make £95bn in 10 years.

The company made just under £3.6bn in free cash, which means there’s still some growing to do. And it has a lot of potential. One big reason for optimism is an ongoing move to sustainable aviation fuels. Rolls-Royce is in a great position as this unfolds.

Higher defence spending and investments in nuclear power could also boost growth. But a recession could knock things off course.

Can Rolls-Royce do it? I’m not sure and the stock isn’t on my ‘to-buy’ list right now. But again, there’s no way to know without looking at the numbers.

Strengths

Numbers are crucial, but they don’t tell investors everything. A good example of this is British American Tobacco (LSE: BATS).

Based on the numbers alone, things look great. Sales and profits are very steady and the valuation multiples are low. Those are some very positive signs. But there’s something else investors need to pay attention to and it’s not a number.

The issue is that cigarettes – the company’s core product – are in decline. That’s why the stock’s cheap and it’s a major risk. That means there’s a real chance the numbers won’t looks so good in the future. And when it comes, the decline could be sharp.

British American Tobacco is hoping to offset this with growth in other products. That’s a promising business, but is it enough? It might be, but this will depend on things like how well the firm’s nicotine pouches fare against rivals. And no number tells us that.

I’m not convinced about buying the stock. But that’s because of something that investors can’t find just by looking at numbers.

What I look for

When it comes to buying shares, good numbers need to be matched with strong companies. And I’m always looking for both. These are the only things that matter to me. If something doesn’t affects numbers or business prospects, I’m not bothered by it.

Neither Rolls-Royce nor British American Tobacco make my list right now. In both cases, they look attractive from one angle but not the other.

There are a number of other stocks in these categories as well. Fortunately though, there are also plenty that do look good to me. When numbers that makes sense meet with businesses in strong positions, I see opportunities. And can see these in the UK and the US right now.

The post What I look for when searching for shares to buy appeared first on The Motley Fool UK.

More reading

• Should investors consider Rolls-Royce shares as war rocks global markets?
• £20,000 in an ISA today can earn a second income by the summer!
• How much do you need in a Stocks and Shares ISA for a £500 monthly retirement income?
• Down 15% in days, are Rolls-Royce shares suddenly a bargain again?
• The Rolls-Royce share price has now fallen 15%. Time to consider buying?

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts