If you want to invest in a listed company, that is, buy shares, you need to look at some indicators and do a simple calculation. Depending on this, you also understand whether the company is cheap or overvalued.

HotNews.ro invited Kelin Metesh, Deputy CEO of Fondul Proprietatea, to a “coffee” where we had a practical discussion about what the books teach us about how to invest in the capital markets.

*In addition to what we explain below, you should also watch the video discussion as there are still some indicators that will tell you certain things and it’s good to know them. You should review them all before making a purchase decision.

An indicator worth paying attention to is the return on equity or, in English, return on equity

This indicator is the profit that the company receives compared to its equity capital.

“Equity is the net assets owned by shareholders. If I start a company and come with a contribution of 100 lei and get 10 lei in profit next year, my return on capital will be 10/100, that is 10%. This is return of equity that I generate (i.e. profit compared to equity),” Metesh explained.

According to him, this indicator shows me, as a potential investor in a company, what kind of profit I can expect from this company.

“If one company has a 2% return and another has a 15% return, if I look at that alone, it’s clear that I want to work for a company that can generate 15%, not 2%. % alone,” he said.

What ratio does Warren Buffett look at and is it important if you want to buy a company’s stock, in relation to return on capital

Warren Buffett also looks at the owner’s return, that is, the profit of the person who owns the company.

“It’s not about the net accounting profit, it’s about the cash that the company actually generates and keeps for me as a shareholder,” he said.

A company’s profit is not the same as the cash it generates.

“There is a difference between them. If we see that a company has huge profits, it does not mean that it is a very good company. Possible problems with cash flows. In history, there were companies with very high profits that went bankrupt,” he said.

How is it calculated?

This is the net income to which all expenses (depreciation, anything non-cash) are added, after which CAPEX (the investment we have to make annually in the business) and the working capital requirement (what we need to invest in the business) are subtracted ).

“It’s essentially money that I as an owner have at the end of the year after I’ve made the investments that I need to make this company grow over time,” he said.

Based on the indicator owner’s earnings the intrinsic value of the company can be calculated.

“So I calculate the value of the company and then I look at the stock market and see how the two values ​​correlate,” he explained.

• If the theoretical value I calculate is 100 lei. That is, based on what this company should generate for me next year, it should be worth 100. If I look at the stock market and see that this company is worth 70 lei, that tells me that this company is a very good candidate to invest in it.

“The bigger this difference between the internal and market value. The more I believe the market is severely underestimating this company’s potential, the greater the margin of safety. Then it is much more convenient for me to make these investments.

You will make both good and bad decisions

Of course, that doesn’t mean you won’t make bad decisions, but it’s important to make more good decisions.

“Financial success is not a hard science, meaning: Sir, now I want to be a good investor, I’m going to read everything there is to read about investing, I’m going to apply all the patterns I see out there, and I’m going to become a successful investor. This is not true,” says Kalin Metesh.

According to him, it is important to have this theoretical knowledge, to know these models, but a lot of financial success comes from psychology, psychological training, creating a set of habits that bring additional value over time.

“If you make a regular investment plan, you should stick to it whether the stock market goes down or up. In theory it seems easy, it seems normal, we invest, but the moment we see a drop of 30-40%, a lot of people say that they will wait a little longer for the markets to recover and then start investing again,” he added .