Before you make any investments in companies these are some questions you should ask yourself and make sure you have the answers to them. These questions will help you rationalize your investment choices and will help you see if your initial sentiments about the company are still valid. Finding answers to these questions may take some time and will involve some research on your part but in most cases the data is available to you in the public domain.
Did you look at the financial statements released by the company for the last five years?
Financial statements have a lot of data hidden between the numbers. Take a look at the balance sheet to understand what assets and liabilities the company has, what was their revenue, what is their operating and net profit margin. What is the trend in the earning, trends in operating expenses, etc.? As far as possible you should do this exercise for each and every company you plan to invest in. You can also buy research that is available from research analysts that describe these patterns in the financial statements. Another thing to look for in financial statements is footnotes. Footnotes can materially impact the numbers reported. A reported profit may be due to a non-recurring event like a sale of assets that was held on book for less than their market value.
Are you aware of the top risks facing the company?
There are many events that can have a negative impact on the income of the company. When looking at potential investment, you should identify these risks, evaluate their likeliness and judge their impact on the company. Once you know the main risks, be sure you are comfortable taking those risks when making the investment.
Are you aware of the company’s management team’s track record?
What separates two companies making similar product and having similar technologies? Their management team. A good management team behind a company can execute plans they have laid for the future of the company and help the company grow. A CEO and top executives with established track record of working in the industry are the basic requirements. See the past achievements of the management team and see their claims of the future. If there is a mismatch, it could be a reflection that the team is over promising and under delivering.
How will the company’s competitors affect the company?
Competitors can take away market share from your target investment company by making better products, using advanced technology and better skilled employees. Is the company you are looking to invest in prepared for such challenges?
What is the future of market the company operates in?
A company can be making very high quality products and be a leader in its market but it still a concern if the market the company is operating in is shrinking. Develop an understanding of the overall market / industry the company operates in and see if the overall market size has increased or decreased over the period of time.
Are the insiders in the company buying or selling shares?
Insiders are the top management in the company. Are they buying or selling company stocks. For public companies this data is available to you and can be a key indicator of the health of the company as insiders are often aware of events before they are publicly announced.
Do you understand how the company makes money?
This may be seems to be a simple questions but as organizations become more complex, often they get distracted from their core business and get in to many other things. While this may not be a bad thing by itself, as in investor it becomes difficult to tell what you are investing in and how your target company makes money. A business model you can understand and articulate and see it flowing properly through the financial statements should give you better understanding of the company overall.
Asking these questions will help you develop and better understanding of the company you are looking to invest in.