Look for companies that show a consistent pattern of earnings growth. Ensure that the earnings are derived from core business operations rather than one-time events, such as investment gains or the sale of real estate and other assets. It's also important to verify that the earnings not distributed to shareholders are reinvested back into the business.

**Earnings Per Share (EPS)** represents the portion of a company's net income allocated to each outstanding common share. Ideally, EPS should reflect both earnings stability and a positive trend when compared across different quarters or years.

One way to employ the **P/E ratio** in the search for good stocks is to find companies with a **low P/E ratio** relative to others in the same industry. The **P/E ratio** tells investors how much they are willing to pay for each unit of a company's earnings.

- **High P/E**: Often associated with growth stocks, indicating higher future performance expectations. However, they can be riskier due to higher volatility.
- **Low P/E**: Typically seen in value stocks, suggesting they are undervalued and could present a buying opportunity before the market corrects the mispricing.

The **P/E ratio** helps investors compare stocks and determine which is a better valuation. If Stock A has a P/E of **15** and Stock B has a P/E of **30**, Stock A is considered **cheaper** despite its absolute price.

Free cash flow yield is a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. The ratio is calculated by taking the free cash flow per share divided by the current share price.

A **low ratio** is good for the investor since the market price is being supported by a significant amount of cash flow. This situation allows room for the market price of the stock to increase. Conversely, a **high ratio** means the market price is not backed by much cash flow, making it more likely to stay flat or decline.

Free Cash Flow can be calculated as follows:

**Free Cash Flow Yield = EBITDA – Taxes – Finance Interest – Capital Expenditures (CapEx) - Increase in NWC**
- **EBITDA**: Earnings before interest, taxes, depreciation, and amortization. - **NWC**: Net Working Capital.
Free Cash Flow Yield determines if the stock price provides good value for the amount of free cash flow being generated. Generally, for dividend stocks, **yields above 4%** warrant further research, while **yields above 7%** are considered high rank.

Look for a **return on equity (ROE)** that is consistently high compared to other companies in the same industry or shows a strong pattern of growth. A steady **ROE above 15%** is often a sign of a company that manages itself well.

**ROE Formula:** **ROE = Net Profit ÷ Shareholder's Equity**
If a company's **ROE grows year after year**, it suggests **long-term stock strength**, making it attractive for investors.

Dividend yield is an easy way to compare the relative attractiveness of various dividend-paying stocks. It tells an investor the yield he can expect by purchasing a stock. Dividend yield is the relation between a stock’s annual dividend payout and its current stock price. Since stock prices fluctuate daily, **dividend yield changes accordingly**.

**Higher dividend yields aren’t always attractive**, as they could be the result of a declining stock price.

**Formula for Dividend Yield:** **Dividend Yield = Annual Dividend ÷ Average Cost Price of Stock**
This metric tells you the **percentage return** an investor receives based on their purchase price. A **long history of raising dividends** indicates **financial strength** and **sound cash management** in both good and bad times.

Dividend-paying companies allocate their earnings in different ways: - Returning money to shareholders. - Reinvesting for growth. - Paying off debt. - Increasing cash balances.

**Payout Ratio Formula:** **Payout Ratio = Dividends Per Share (Common & Preferred) ÷ Earnings Per Share (EPS)**
A **high payout ratio** could indicate **limited reinvestment opportunities** or an **unsustainable dividend**. Ideally, an **optimal investment** would have a **high dividend yield and a low payout ratio**, while a **low yield and high payout ratio** may signal weak future growth potential.

The **Market to Book Ratio** (also known as **Price to Book Ratio**) is a **financial valuation metric** that compares a company’s **market value** to its **book value**.

- **Market Value** = The current stock price of all outstanding shares (what the market believes the company is worth). - **Book Value** = The amount remaining if the company liquidates all assets and repays all liabilities (net assets from the balance sheet).

**Formula for Market to Book Ratio:** **M/B Ratio = Share Price ÷ Net Book Value per Share**
Where: **Net Book Value per Share** = (Total Assets – Total Liabilities) ÷ Outstanding Shares

- **M/B Ratio < 1** → The market does not value the stock equal to its book value, suggesting assets may not be fully realizable in case of liquidation. - **M/B Ratio > 1** → The stock price is overvalued, but this should be analyzed by comparing it to industry peers and future earnings growth.

**Ideal Book-to-Market Ratio:** - **Around 1** → Generally considered reasonable. - **Less than 1** → The stock is undervalued and can be bought for less than the value of its assets. - **Above 3** → The stock may be expensive relative to its book value.

Investors should **diversify** their portfolio by investing in **leading stocks** across **different industry sectors**.

**Why is diversification important?** - It **reduces risk** by spreading investments across multiple industries. - It **positively influences price movements** when the market index goes up. - It helps **stabilize returns** in case one sector underperforms.

By holding a mix of **strong leader stocks** from various sectors, investors can **balance risk and opportunity** while positioning themselves for potential market gains.

The **Debt-Equity Ratio** measures how much debt a company has compared to its **shareholders' equity**.

- **Lower debt-equity ratios** are generally preferable, but acceptable levels vary by industry. - **Highly leveraged companies** may struggle more in economic downturns. - The ratio does not include **short-term liabilities** like accounts payable or **long-term liabilities** like pension obligations.

**Key Interpretations:** - **Ratio > 1** → The company has more liabilities than assets, making it technically insolvent. - **Ratio = 0.5 (50%)** → Half of the company’s assets are financed through debt.

**Why it Matters?** - **Investors** use it to determine if a company can meet debt obligations and provide returns. - **Creditors** analyze it to assess a company's ability to repay loans before extending credit.

**Beta** measures a stock's **sensitivity** to market movements, indicating its **systematic risk**.

**Calculation:** - **Beta = Covariance of stock returns and market returns ÷ Variance of market returns**

**Interpretation:** - **Beta > 1.0** → The stock is more volatile than the market (higher risk, higher potential returns). - **Beta < 1.0** → The stock is less volatile than the market (lower risk, lower returns).

**Why Beta Matters?** - **High-beta stocks** are riskier but may generate greater rewards. - **Low-beta stocks** are safer but tend to yield lower returns.

The **Sharpe Ratio** measures **risk-adjusted returns**, helping investors compare investment performance relative to risk.

**Formula:** **Sharpe Ratio = (Portfolio Return - Risk-Free Rate) ÷ Portfolio Standard Deviation**

**Interpretation:** - **Sharpe Ratio > 1.0** → Acceptable risk-adjusted return. - **Sharpe Ratio > 2.0** → Very good investment. - **Sharpe Ratio > 3.0** → Excellent investment. - **Sharpe Ratio < 1.0** → Sub-optimal investment.

**Why It’s Important?** - Helps investors understand the **return per unit of risk**. - Aids in comparing portfolios and **identifying the best risk-reward balance**.

**Riyal-Cost Averaging** is an investment strategy where a fixed amount is invested at **regular intervals**, regardless of stock price fluctuations.

**Key Principles:** - Invest **a fixed amount** on a **regular schedule**. - Buy **more shares** when prices are low and **fewer shares** when prices are high. - **Lowers the average purchase price** over time compared to market price fluctuations.

**Why It Works?** - Reduces the impact of market volatility. - Encourages **consistent saving and investing habits**. - Helps **average out market price variations**, making investing less stressful.

**VWAP (Volume-Weighted Average Price)** measures the **average price** of a security adjusted for its volume during a trading session.

**Interpretation:** - **Price < VWAP** → Stock is undervalued (good for buying). - **Price > VWAP** → Stock is overvalued (good for selling). - **Above VWAP** → Bullish trend (buying pressure). - **Below VWAP** → Bearish trend (selling pressure).

**VWAP Calculation Steps:** 1. **Compute the Typical Price:** Typical Price = (Low + High + Close) ÷ 3 2. **Apply VWAP Formula:** VWAP = (Σ (Volume × Typical Price)) ÷ (Σ Volume)

**Why It’s Important?** - **Gives a smoothed average price** for better trading decisions. - Helps **identify bullish or bearish trends** in intraday trading. - Used by traders to **find optimal entry and exit points**.

The **Correlation Matrix** evaluates the relationship between two variables in a dataset.

**Key Insights:** - **Correlation Coefficient = 1** → Strong positive relationship. - **Correlation Coefficient = 0** → No relationship. - **Correlation Coefficient = -1** → Strong negative relationship.

**Importance of Diversification:** - A well-diversified portfolio has low to moderate correlation values (**0 to 0.5**). - Helps reduce **unsystematic risks** such as financial, operational, and strategic risks. - Investors should select stocks from **different sectors** to minimize portfolio risk.

**Value at Risk (VaR)** is a statistical measure of potential investment loss over a given period.

**What It Measures?** - The **worst-case loss** for a portfolio at a given confidence level. - The **probability** of that loss occurring within a specified time frame (e.g., 1 day, 10 days).

**Why It’s Important?** - Helps investors **limit potential losses** by setting stop-loss levels. - Aids in portfolio risk assessment by identifying **extreme losses (tail risk)**. - Investors should focus on minimizing **VaR** to ensure a safer investment strategy.