When Elon Musk’s SpaceX launched on to the stock market, tens of thousands of Britons clamoured to buy a stake, highlighting the growing trend of DIY investing. However, buying shares in individual companies can be rewarding but risky. Without a large amount of capital, investors often end up with a concentrated portfolio, exposing them to the fortunes of a few firms. High-profile initial public offerings (IPOs) often trigger this interest; it has been reported that more than 100,000 individual UK investors applied for just under $1bn of SpaceX shares.
Why Research Matters
Before diving in, thorough research is essential. This includes examining financial health, anticipated returns, and profitability. Jemma Slingo, a pensions and investment specialist at Fidelity International, says that looking at data helps investors “ask the right questions”, such as whether they are paying a reasonable price and if shareholder returns are sustainable. However, she cautions that numbers “cannot predict the future, and past performance is not a reliable indicator of future returns”.
Listed companies must publish financial results, accessible on sites like Investegate, Yahoo Finance, and investment platforms such as Fidelity. Yahoo Finance allows comparison of data across stocks and competitors. Below is a guide to key investment data that can offer vital insights before buying shares.
Price-to-Earnings (P/E) Ratio
The P/E ratio measures a company’s share price relative to its earnings per share, indicating how much investors pay for every £1 of profit. It is calculated by dividing the current share price by earnings per share. There is no objectively good or bad number; it depends on context. Slingo notes that the average FTSE 100 company has a P/E of about 12. A lower P/E could suggest a cheaper stock, but may also indicate weaker future growth expectations. Conversely, a higher P/E may be justified if the company is growing quickly. Victoria Scholar, head of investment at Interactive Investor, says some investors use a P/E of 15 as a rough guide, with anything below seen as relatively inexpensive, though valuations vary by sector. For example, data from Fidelity shows NatWest has a low P/E of 9.52, while Metro Bank’s is much higher at 22.05.
Price-to-Book (P/B) Ratio
The P/B ratio compares a company’s stock market value to its assets minus liabilities, revealing whether shares are fairly priced. It is calculated by dividing the share price by the book value per share. A number below one implies undervaluation, while above one suggests overvaluation. This metric is useful for companies with cash and physical assets, such as banks. Slingo says the P/B ratio is crucial for investors, noting that after the 2008 financial crisis and reinforced by the pandemic, banks had low P/B numbers due to rising bad debts and weak loan demand. However, the sector saw a “dramatic rerating” in late 2023 and early 2024, with several banks now having a P/B ratio above one and share prices rising.
Return on Equity (ROE)
ROE shows how effectively management uses shareholders’ investments to generate profits. It is calculated by dividing net income by shareholders’ equity. Lee Wild, head of equity strategy at Interactive Investor, says many websites suggest a ratio of 15% to 20% is good, but it depends on the industry. Tina Cook, senior equity analyst at Raymond James, cites Halma, a life-saving technology group, which had an average ROE of 17% over the past five years. Scholar notes that the debt-to-equity (D/E) ratio should be considered, as higher debt inflates ROE. The D/E ratio, found on Yahoo Finance, compares total liabilities to shareholders’ equity.
Dividend Yield
Dividend yield reveals how much a company pays out in dividends as a percentage of its share price. It is calculated by dividing the annual dividend per share by the current share price, then multiplying by 100. This metric is useful for income-seeking investors. Slingo says a high yield may be attractive but can be a warning sign if the dividend is unsustainable. “Investors should look at whether dividends are supported by earnings and cashflow, rather than focusing on the headline figure alone,” she says. Cook notes that Procter & Gamble is a “dividend king” with 70 consecutive years of payout increases, returning more than $16bn ($9.9bn in dividends and $6.5bn in buybacks) in fiscal 2025. Among UK banks, Metro Bank is alone in paying no dividend.
Cashflow and Net Debt
Cashflow shows money moving in and out of a company over a period. Cook describes strong cashflow as the “lifeboat of a business”, providing flexibility to invest and return value regardless of the economic backdrop. Net debt offers insight into financial stability; it is calculated by subtracting cash and cash equivalents from total debt. Scholar says companies with strong cashflows and lower debt are typically more resilient, while excessive debt can be risky. She cites Marks & Spencer as an example: in 2022, debt was falling and it traded at a cheap P/E ratio compared to rivals, with the share price below 100p. It is now about 390p, thanks to strong growth in its grocery market share and improvements in clothing, home, and beauty divisions.
Investor Tips: Aidan's Experience
Aidan, a retired NHS worker from Suffolk, began investing independently 13 years ago after being disappointed with the returns and management of his investments. He switched to AJ Bell for its fees and company range, and now invests for his family using ISAs and other products. His key factor is the quality of management, looking at previous employment, experience, and relevance to the company’s strategy. Since 2015, he has invested in Hill & Smith (total return 217% over 10 years), Avingtrans (287% over 10 years since 2017), and Hargreaves Services (124% over five years since 2021). He often finds triggers for investigation in the Financial Times and Investors’ Chronicle.
