Don’t just rely on the dividend yield, or a low-priced stock that pays dividends can lead to what The Motley Fool calls a « dividend trap »
1. P/E Price-to-Earnings ratio - the higher the P/E ratio, the more expensive a stock is relative to its earnings
Earnings per share = profits/ number of outstanding shares
P/E =stock price/EPS
2. Free cash flow
More cash in, even if not going out in dividend, is good.
If dividends are greater than cash in, this is a red flag!
3. Debt-to-Equity ratio = total liabilities/total shareholder equity
A Low D-E R is more funded through equity, which is preferred.
A high D-E R means a company is funded more by debt, which is riskier.
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