The order in which companies are filtered based on given metrics does not matter, as eventually, companies passing all metrics will prevail and be deemed to have passed the profitability aspect of an investor’s quantitative analysis. All the values are subjective because they depend on the industry itself, as some are more profitable than others. However, when solely considering the profitability aspect in the context of quantitative analysis, it is better and safer to invest in companies that show higher absolute profitability rather than relative profitability within their own industry. For starters, investors should ask themselves why they would invest in a company that is barely profitable. It must be noted that the suggested metric values are the bare minimum and serve as a guide for quantitative analysis.
In this second part of this series on what to look out for when investing, we will discuss the profitability of a company. Profitability in this context refers to what qualifies as a good benchmark when doing quantitative analysis, to pick out companies that have good profitability and setting boundaries for what is both acceptable and exceptional profitability. Again, only Singapore-listed companies will be studied for the benefit of domestic investors who value profitability as an important component when researching stocks.
Profitability, when doing quantitative analysis, mainly covers items on both the income statement and cash flow statement. The income statement is also known as the profit and loss statement. As its name suggests, it shows how profitable or loss-making a company is, thus making it a good reference point to gauge the profitability of a stock. The cash flow statement basically shows the inflow and outflow of cash in a company. It can be referenced to determine the cash flow profitability of a company, mainly for its operating cash flow and free cash flow.
