‘Ask the right questions’: what you need to know before buying shares

Whether it is SpaceX or a bank, getting the right facts about a firm can offer vital insights before you invest in it

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.

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. This means you are more exposed to the ups and downs of those companies’ fortunes.

Maybe you have been putting money into funds for a while and have decided to choose a few individual companies to invest in, or maybe you want to build your own portfolio with no help.

High-profile initial public offerings (IPOs) can often be the catalyst for this: it has been reported that more than 100,000 individual UK investors applied for just under $1bn of SpaceX shares.

But, whatever your background, before you dive in and start buying shares in individual companies, it is vital you do your research. This should include looking at facts and figures that reveal something about a business’s financial health, anticipated returns and profitability. This will help you discover any warning signs about a company’s long-term prospects.

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 the returns shareholders are getting look sustainable.

However, she says the numbers “cannot predict the future, and past performance is not a reliable indicator of future returns”.

Listed companies must publish financial results. You can find them on sites such as Investegate, Yahoo Finance and investment platforms such as Fidelity. Yahoo Finance allows you to compare data for several stocks, and a company’s current and past investment data and that of its competitors.

Here is a guide to some of the investment data that can offer vital insights before buying shares in a company.

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 a company makes. The ratio is calculated by dividing the current share price by earnings per share.

There is not “an objectively ‘good’ or ‘bad’ number” when looking at the P/E ratio and it depends on what the company is being compared with, Slingo says.

She says the average FTSE 100 company has a P/E of about 12. While a lower P/E could suggest a stock is cheaper, it does not necessarily represent better value, as it could also indicate weaker future growth is expected, she adds.

“Equally, a higher P/E may be justified if a company is growing quickly and has strong prospects,” Slingo says.

Victoria Scholar, the head of investment at the platform Interactive Investor, says some investors use a P/E of 15 as a rough guide, with anything below seen as relatively inexpensive, but adds that valuations vary by sector.

To give you an example of what you might find, we looked at data from Fidelity for some of the UK’s biggest banks (see table). At the time of writing, it shows NatWest has a relatively low P/E ratio among UK banks at 9.52, while Metro Bank’s is much higher at 22.05.

The P/B ratio compares a company’s stock market value to its assets minus liabilities, and can reveal whether its shares are fairly priced. You divide the share price by the book value per share, which you can find for a specific company under Statistics on Yahoo Finance. A number below one implies it is undervalued, while above one suggests the opposite.

This data is helpful for analysing companies with cash and physical assets. Slingo says the P/B ratio is a crucial metric for investors, which could be used when looking at banks. She flags that investors have been wary of banking stocks owing to rising bad debts and weak loan demand after the 2008 financial crisis, which was reinforced by the pandemic. This was shown by them having low P/B numbers.

But the sector had a “dramatic rerating” in late 2023 and early 2024, Slingo says. Now several banks have a P/B ratio above one, and the share price of the big banks have recorded a sustained rise.

ROE shows how effectively a company’s management uses shareholders’ investments to generate profits. It is calculated by dividing the company’s net income (income after business costs are deducted) by shareholders’ equity (total assets minus total liabilities).

Lee Wild, the head of equity strategy at Interactive Investor, says many websites suggest a ratio of 15% to 20% is good, but adds that it depends on the industry, so comparing with companies in the same sector is the best approach.

Tina Cook, a senior equity analyst at the investment company Raymond James, cites the example of the life-saving technology group Halma, which has had an average ROE of 17% over the past five years.

Scholar says the debt-to-equity ratio (D/E) ratio should be considered, because when there is more debt, the ROE rises. The D/E ratio, which can be found on Yahoo Finance, measures how a company finances its operations by comparing total liabilities to shareholders’ equity.

This reveals how much a company pays out in dividends (a portion of profits distributed to shareholders) as a percentage of its share price. To calculate it, you divide the annual dividend of a share by the current share price, then multiply by 100.

The dividend yield is useful for investors seeking an income. Slingo says a high yield may reveal an attractive opportunity, but can be a warning sign if there is doubt over whether the dividend is sustainable.

“Investors should therefore look at whether dividends are supported by earnings and cashflow, rather than focusing on the headline figure alone,” she says. This can be tricky, as investors must look at whether a company is consistently profitable, if it converts a good proportion of profits into cash, and if cashflow is stable.

Cook says the household goods company Procter & Gamble is a “dividend king”, with a long track record of consistent and growing shareholder returns, and 70 consecutive years of payout increases.

She says P&G returned more than $16bn (£11.9bn) to shareholders in the financial year 2025 – $9.9bn of which was in dividend payments and $6.5bn in share buybacks.

Among the banks in our table, Metro is alone in paying no dividend.

Cashflow shows how much money goes in and out of a company over a specific period.

Cook says strong cashflow is the “lifeboat of a business”, as it offers flexibility to invest for future growth while returning value to shareholders, regardless of the economic backdrop. She says P&G has made returns to shareholders while still investing in the business.

Net debt offers investors some insight into how financially stable a company is.

“Companies with strong cashflows and lower debt levels are typically seen as more resilient and better able to withstand financial challenges,” says Scholar, who adds that excessive debt “can be risky”.

To calculate net debt, subtract the firm’s cash and cash equivalents from the total debt.

Scholar says Marks & Spencer was a good example of an attractive stock in 2022, as debt was falling and it traded at a cheap P/E ratio compared with its rivals. The share price fell below 100p. It is now about 390p, at the time of writing, thanks to strong growth in M&S’s grocery market share and improvements at the retailer’s clothing, home and beauty divisions.

“I went out on my own looking at investments 13 years ago,” says Aidan, from Suffolk, who is retired and used to work for the NHS.

He was disappointed by the returns and management of his investments, and switched to the AJ Bell platform owing to its fees and the range of companies available.

Aidan started investing on behalf of his family, using various products, including Isas. He has invested in funds, exchange-traded funds, investment trusts and individual companies, and also holds some cash.