In this piece, we will take a look at the ten most successful penny stocks that made it big. If you want to skip our primer on penny stocks and need to jump ahead to the top five stocks in this list, then take a look at 5 Most Successful Penny Stocks That Made It Big.
The world of investing is full of tricks and opportunities, and the massive success of a handful of firms on the stock market has made their founders and investors billionaires. The market is responsible for producing some of the richest individuals in history, such as the founder of Microsoft Corporation (NASDAQ:MSFT) Mr. Bill Gates, and the electric vehicle billionaire Mr. Elon Musk. At the same time, it has also caused others painful losses.
These fantastic gains continue to draw large amounts of attention from retail investors in particular, and one segment that catches a lot of this interest is the penny stock sector. Defined as those stocks that trade at less than $5 per share by the Securities and Exchange Commission (SEC), droves of investors flock to these stocks as the low share price presents an attractive entry point and even small gains can result in large profits.
When evaluating a penny stock, some metrics take precedence over others. Mostly these stocks either belong to firms will small market shares and revenues or those that are struggling. These factors require careful stock picking, and a look at the balance sheet and the cash flow statement can provide useful tools to sift out any potential problems. For example, through the Debt Ratio, which analyses a firm’s total debt with its total assets, an investor can determine if a company is overly leveraged and has taken on too much debt. Too much debt not only ends up burdening the income statement in the form of interest payments, but it also affects payouts to shareholders in case a firm ceases to be a going concern since debt holders get the first priority for payments.
Another ratio, which is especially useful for a penny stock, is the price to cash flow ratio. A firm’s cash flow is the amount that is left for investors after its expenses are deducted, and when the share price is divided by the cash flow per share, an estimate of the ‘market premium’ for the share price can be determined. The usefulness of this metric lies in the fact that if a company has sound fundamentals, then it might see its share price jump in the future if there is little premium to it at the time of investment.