How To Identify The Best Shares To Buy
How To Identify The Best Shares To Buy (Beginner’s Complete Guide)
Introduction
Investing in shares (stocks) is one of the best ways to build long-term wealth.
But many beginners make a common mistake. They buy shares based on:
- rumors,
- social media hype,
- or quick tips instead of proper research.
Successful investors do something different. They study companies carefully before investing.
They analyze:
- financial statements,
- profits, revenue trends,
- dividends,
In this article, you will learn how to identify the best shares to buy using proven research methods used by professional investors.
Why Research Is Important Before Buying Shares
When you buy shares, you are not just buying numbers on a screen — you are buying ownership in a business.
A good company can grow your investment over time, while a weak company can destroy your capital.
That is why investors use fundamental analysis, which studies a company’s financial health and business performance before investing.
Fundamental analysis helps investors:
Understand whether a company is profitable
Identify undervalued shares
Reduce investment risk
Make long-term investment decisions
Experts emphasize that understanding company fundamentals allow investors to judge whether a stock price is reasonable or overpriced. (Encyclopedia Britannica)
Read How to invest in the shares of profitable company shares
Step 1: Study the Company’s Profit and Loss Account (Income Statement)
The profit and loss account (P&L) — also called the income statement — shows how much money a company earns and spends during a specific period.
Simply put:
Revenue – Expenses = Profit or Loss
The income statement helps investors understand how a company makes money and whether its business model is working. (Encyclopedia Britannica)
What to Check in the P&L Statement
1. Revenue Growth
Revenue is the company’s total sales (also called the “top line”).
Look for:
Consistent growth over 3–5 years
Stable or increasing sales
No sudden unexplained drops
Growing revenue usually means increasing demand for the company’s products or services.
2. Net Profit
Profit shows how much money remains after expenses.
A good company normally has:
Increasing profits over time
Positive earnings every year
Improving profit margins
If revenue grows but profits fall, it may indicate poor cost management.
3. Expense Control
Check whether expenses are rising faster than revenue. Companies that control costs effectively usually perform better long term.
Also read 15 Advantages of investing in the shares of profitable company shares
Step 2: Analyze the Balance Sheet Carefully
The balance sheet shows the company’s financial position at a specific moment — what it owns and what it owes.
It contains three main parts:
Assets – What the company owns
Liabilities – What the company owes
Equity – Owners’ value after debts
The balance sheet helps investors evaluate financial stability and risk.
Key Things to Examine
1. Debt Level
Too much debt can be dangerous.
Look for:
Manageable loans compared to assets
Declining debt over time
Ability to repay obligations
High debt makes companies vulnerable during economic downturns.
2. Cash and Cash Equivalents
Strong companies usually maintain healthy cash reserves to run operations smoothly.
3. Shareholders’ Equity
Growing equity shows that the company is creating value for investors.
You may also like Why balance sheet is important to every business owner
Step 3: Check the Company’s Cash Flow
Many beginners ignore cash flow — but professional investors consider it extremely important.
A company can show profits on paper but still run out of cash.
The cash flow statement tracks real cash entering and leaving the business through:
Operating activities (daily business operations)
Investing activities
Financing activities
Strong operating cash flow indicates that the business can sustain itself without excessive borrowing. (Wikipedia)
What Good Cash Flow Looks Like
Positive operating cash flow
Cash is increasing over time
Limited dependence on loans
Step 4: Study Dividend History
Dividends are payments companies give shareholders from profits.
Not all companies pay dividends, but consistent dividend payments often signal financial strength.
Research shows dividends contribute significantly to long-term investment returns and often indicate stable business performance. (Investopedia)
What to Look For
Regular dividend payments
Gradually increasing dividends
Sustainable payout ratio
Companies that maintain dividends during difficult periods usually have strong business fundamentals.
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Step 5: Review Revenue and Earnings History
Past performance does not guarantee future results, but trends matter.
Check at least 5–10 years of:
Revenue growth
Earnings per share (EPS)
Profit margins
Consistent growth shows a reliable business model.
Avoid companies with:
Highly unpredictable earnings
Frequent losses
Sudden extreme fluctuations
Step 6: Evaluate Management and Financial Projections
A company’s leadership plays a huge role in long-term success.
Management provides financial projections and future plans in annual reports and investor presentations.
Questions to Ask
Does management have a clear growth strategy?
Are projections realistic or exaggerated?
Has management achieved past targets?
Good leadership usually delivers consistent performance over time.
Experienced investors also assess management credibility by comparing past forecasts with actual results.
Related 10 Reasons why high-dividends paying stocks are better
Step 7: Understand Valuation Before Buying
Even a great company can be a bad investment if bought at the wrong price.
Investors use valuation methods to estimate whether a stock is overpriced or undervalued.
One important concept is the margin of safety, which means buying shares when their true value is higher than their market price. (Wikipedia)
Popular Valuation Metrics
Price-to-Earnings (P/E) Ratio
Return on Equity (ROE)
Earnings Per Share (EPS)
Price-to-Book Ratio
Compare these ratios with companies in the same industry.
Step 8: Compare Companies Within the Same Industry
Never analyze a company in isolation.
Compare it with competitors by checking:
Profit margins
Revenue growth
Debt levels
Dividend consistency
Industry comparison helps you identify which company is performing best.
Step 9: Look for Financial Strength Indicators
Some investors use scoring systems such as financial strength models that evaluate profitability, leverage, and efficiency together.
For example, accounting-based scoring methods analyze profitability and cash flow improvements to identify financially strong companies. (Wikipedia)
Step 10: Think Long Term, Not Short Term
Stock prices move daily because of news, emotions, and market sentiment. But company fundamentals drive long-term success.
Successful investors focus on:
Business growth
Earnings expansion
Competitive advantage
Short-term price movements matter less than long-term performance.
Common Mistakes to Avoid When Buying Shares
Buying based on tips or rumors
Ignoring financial statements
Chasing trending stocks
Investing without research
Putting all money into one stock
Diversification and patience are key to successful investing.
Simple Checklist for Choosing the Best Shares
Before buying any share, ask:
✅ Is revenue growing consistently?
✅ Are profits increasing?
✅ Does the company have manageable debt?
✅ Is cash flow positive?
✅ Does it have a good dividend history?
✅ Is management trustworthy?
✅ Is the stock reasonably valued?
If most answers are yes, the company may be worth deeper consideration.
Frequently Asked Questions (FAQ)
1. What is the most important factor when choosing shares?
The company’s financial health — especially revenue growth, profitability, and cash flow — is the most important factor.
2. Should beginners focus on dividends?
Yes. Dividend-paying companies are often more stable and suitable for beginners seeking steady returns.
3. How many years of financial data should I check?
Ideally review at least 5 years of financial statements to identify consistent performance trends.
4. Is profit more important than revenue?
Both matter. Revenue shows growth, while profit shows efficiency. A strong company usually improves both over time.
5. Can financial statements guarantee good investments?
No. They reduce risk but cannot eliminate it. Market conditions and economic factors also affect share prices.
6. How often should I review my investments?
Review company performance quarterly or annually rather than reacting to daily price changes.
Final Thoughts
Knowing the best shares to buy is not about luck — it is about research and discipline.
By carefully studying:
Profit and loss accounts
Balance sheets
Cash flow statements
Dividend history
Revenue trends
Management projections
you can identify strong companies with real growth potential.
Successful investing is a long-term journey. The more you understand businesses, the better your investment decisions will become.
If you found this guide helpful, feel free to share it or leave a comment with your thoughts or experiences.
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Samuel Ijenhi |
Samuel Ijenhi is a finance and business writer with over 15 years of experience in stock market investing, personal finance, and business management. He holds a B.Sc. in Accounting and previously served as an Assistant Chief Audit Officer.
Samuel Ijenhi helps entrepreneurs and small business owners grow through practical finance and business strategies. Connect with him for more growth insights and business tips.
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