When you hear that a company has good prospects for the future, you may be tempted to invest in it. Buying some of its shares in the stock market may sound like the right move.
If this happens, you must know what to do before investing in a company. Here’s how to start:
1. Look at its history
A company’s track record can tell you whether it’s performing well or not. Here are some good indicators of a growing business:
- Growth in earnings
Learning the company’s earnings growth over time can help you understand how it could do in the coming years. A steady increase in revenue is always a good sign, even if it isn’t a sharp one.
- Dividend history
Dividend history will give you an idea of whether the company is generous when it comes to profit sharing. It also shows consistency and the dividend rate relative to your investment amount.
- Stability over time
How has the company fared during different economic periods? The answer to this question can tell you how it managed during tough times, and how the market responded to its products and services.
Performance dips can be impossible for a company to avoid. However, a big drop in share price or revenue can raise questions about its future since this is what investors mainly look at before investing in a company.
2. Examine its present
After studying a company’s history, it’s time to learn how they’ve kept things going. Consider the following factors:
- Industry trends
Have a look at the broader industry and the products and/or services it provides. If there is enough demand, the industry – and the company you’re interested in – is likely to remain stable or even grow.
- Competition
Does the company have an edge over its competitors? While it doesn’t have to be number 1 for you to consider it, a company that’s fairly competitive may have higher chances of long-term success.
- Debt-to-equity ratio
Publicly listed companies issue annual financial statements. Using these reports, you can calculate the debt-to-equity ratio.
This lets you compare the company’s total liabilities with its shareholder equity. The higher the ratio, the more debt the company has taken on.
- Price-to-earnings ratio
Financial statements will also allow you to determine the price-to-earnings ratio. This helps you see how the company’s stock price is doing in relation to how it’s earning.
A higher ratio means that investors are willing to pay more for shares because they expect growth in the future. A lower ratio can indicate that the company is undervalued.
- Leadership
You should also study how well the company is being managed. Good leaders can weather storms, take advantage of opportunities, and steer the company towards growth.
You’ll often find this information in reports that stock brokerage firms share with their clients. These reports are available so investors don’t have to analyze, compute, and research on their own.
3. Foresee the possible future
Forecasts come in various shapes and sizes to guide investors in making informed decisions. You may find charts, financial reports, or consensus studies that aim to predict market trends.
Putting these things all together can help you see if shares of a certain company might be a good addition to your portfolio.
While there are many ways to evaluate a company’s health, you must remember that there are no guarantees you’ll get the returns you expect.
If you choose to invest, practicing peso-cost averaging can help you manage potential risks.
