When Elon Musk’s SpaceX launched on to the stock market, tens of thousands of Britons clamoured to buy a stake, putting the spotlight on DIY investing. It has been reported that more than 100,000 individual UK investors applied for just under $1bn of SpaceX shares.
Do Your Research Before Diving In
Going it alone and buying shares in individual companies can be rewarding, but also risky. Unless you have a huge amount of cash, you are likely to end up investing in far fewer companies than if you invested in a fund, meaning you are more exposed to the ups and downs of those companies’ fortunes.
Before you start buying shares, vital research should include facts and figures that reveal a business’s financial health, anticipated returns and profitability. Jemma Slingo, a pensions and investment specialist at Fidelity International, says looking at data can help investors “ask the right questions”, including if they are paying a reasonable price and whether returns look sustainable. However, she cautions that the numbers “cannot predict the future, and past performance is not a reliable indicator of future returns”.
Key Financial Metrics
Listed companies must publish financial results. They can be found on sites such as Investegate, Yahoo Finance and investment platforms like Fidelity. Yahoo Finance allows comparison of data for several stocks, as well as current and past investment data and that of competitors.
Price-to-earnings ratio (P/E): The P/E ratio measures a company’s share price relative to its earnings per share. It indicates how much investors are willing to pay for every £1 of profit. The average FTSE 100 company has a P/E of about 12, says Slingo. She adds that a lower P/E could suggest a cheaper stock but may indicate weaker future growth, while a higher P/E may be justified if a company is growing quickly and has strong prospects. Victoria Scholar, head of investment at Interactive Investor, notes some investors use a P/E of 15 as a rough guide, with anything below seen as relatively inexpensive, but valuations vary by sector.
For example, at the time of writing, NatWest has a relatively low P/E ratio among UK banks at 9.52, while Metro Bank’s is much higher at 22.05.
Price-to-book ratio (P/B): The P/B ratio compares a company’s stock market value to its assets minus liabilities. A number below one implies it is undervalued, above one the opposite. Slingo says this metric is crucial for analysing banks. After the 2008 financial crisis, banks had low P/B numbers, but the sector had a “dramatic rerating” in late 2023 and early 2024, and several banks now have a P/B ratio above one.
Return on equity (ROE): ROE shows how effectively management uses shareholders’ investments to generate profits. Lee Wild of Interactive Investor says many websites suggest a ratio of 15% to 20% is good, but it depends on the industry. Tina Cook of Raymond James cites Halma, which has had an average ROE of 17% over the past five years. Scholar adds that the debt-to-equity ratio should be considered, because more debt can inflate ROE.
Dividend yield: This reveals how much a company pays out in dividends as a percentage of its share price. Slingo says a high yield may be attractive but can be a warning sign if the dividend’s sustainability is in doubt. “Investors should therefore 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 to shareholders in financial year 2025. Among UK banks in the table, Metro Bank alone pays no dividend.
Cashflow and net debt: Cook describes strong cashflow as the “lifeboat of a business”. Scholar says companies with strong cashflows and lower debt levels are typically seen as more resilient. Marks & Spencer is an example: its share price fell below 100p in 2022 but is now about 390p, thanks to strong growth in its grocery market share and improvements in its clothing, home and beauty divisions.
An Investor’s Approach
Retired investor Aidan from Suffolk says the quality of a firm’s management is key. He looks at their previous employment and the relevance of their experience to the company’s strategy. Since 2015, he has invested in companies including Hill & Smith (total return 217% over 10 years), Avingtrans (287% over 10 years), and Hargreaves Services (124% over the past five years). He often gets triggers from the Financial Times and Investors’ Chronicle.
