The Big Word “Penny Stocks”

Updated: Feb 10


A penny stock typically refers to the stock of a small company that trades for less than R10 per share or listed companies with a market cap of less than R1, 5 billion, small-cap stocks.


Penny Stocks and low-priced shares can turn a small investment into a lot of money and on the other hand you can lose everything.


Penny stocks are most suitable for investors who have a high-risk appetite. Typically, penny stocks have a higher level of volatility, resulting in a higher potential for reward and, thus, a higher level of inherent risk.


Pros of Penny Stocks

  • Today’s penny stocks are tomorrow's big winners

  • Gains can be rapid

  • Low Price

Cons of Penny Stocks

  • Companies lack track records, can’t determine the stocks potential

  • More losses than gains

  • Low trading volume

  • No Income (Dividend)

Important:

  • Pick well-known companies

  • Take a look at the Key Indicators


Key Penny Stock Indicators



1. Price-to-Sales (P/S)

By dividing the current share price of the penny stock by the company's annual sales, you will see if the investment is over or undervalued.

Lower values are better than higher ones.



2. Current Ratio

This one is of monumental importance with penny stock companies. By dividing current assets by current liabilities, you will see how well the business can cover its short-term debts with short-term assets.

Avoid any penny stocks with a current ratio less than or near 1.0. Ideally, you'll find investments that boast this value at 2.0 or more - the higher, the better.



3. Quick Ratio

While the current ratio takes all assets into account, the quick ratio only considers assets that can quickly and easily be used. This means it doesn't include items like inventories but rather focuses on cash, marketable securities, stock market investments, and accounts receivable. By dividing the more liquid assets by the current liabilities, you will get an idea of how many times over the business can more easily cover what it owes in the short term.

Always look for a quick ratio of at very least 1.0, but ideally 2.0 or more. Higher numbers are better.



4. Operating Cash Flow

This considers cash flow from operations, then divides it by current liabilities. This ratio shows how well the penny stock business can cover what it owes in the short term (the next 12 months) using its cash flow.

Higher numbers are better than lower, but even values slightly below 1.0 are acceptable.



5. Inventory Turnover

This shows how effective the business is in producing and selling products. A company that produces and sells its inventory five times a year is twice as efficient as one which produces and sells its inventory only 2.5 times.



6. Debt Ratio

This is a simple one, but it is an important one. Just divide total liabilities by total assets. Look for values below 0.5.



7. Negative Net Debt (Net Cash)

Companies that have little to no debt will often have a negative net debt (or positive net cash) position. A negative amount indicates that a company possesses enough cash to pay off its short and long-term debts and still have excess cash remaining.


Research:


I Used TradingView and selected some of the above criteria, look at these results and understand how you can use this to assist you to make the best investment decision. Nothing is ever guaranteed but you can sit back knowing you did your homework.



Penny Stock Investments can be very exciting if you have it all worked out and wait patiently for the big dream to turn into reality.


Happy Investing!



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