What are the points you should definitely review before buying a share?
Before you buy shares, you can have an impact on how your money performs later. By buying shares, you have the opportunity to have an outstanding return. As discussed in the section on this, there is a huge difference between share and share.
If you don’t choose an actively managed equity fund or equity ETF, you must select the shares yourself. You can also ask for expert help through the contact menu. If you want to get acquainted with the topic on your own, be sure to review at least the questions below.
In which industry is the company present?
A software company has a completely different profit-making capability than, say, a car manufacturer. Partly because it doesn’t need capital-intensive factories. There is no better or worse area, only under certain circumstances can one or another company perform better. And with that, the dividend-paying ability and price of their shares are also changing.
The industry in which the company operates also shows whether you want to invest because of dividend payments or the possibility of exchange rate gains. That is, how you can make the most profit.
What is the value of the share?
The price of the shares resulting from the valuation of the shares and the actual performance of the company do not necessarily overlap. The exchange rate depends largely on how investors see how that company works. If you think of the downturn caused by the coronavirus, a lot of companies’ stocks have fallen in price simply because they have temporarily stopped production.
If you look at the value of McDonald’s shares, you can see that it crashed due to quarantine and then the situation restarted as the situation settled.
This, of course, affected not only that company, but almost every company. Regardless of the shutdown, the factories have survived, so once the conditions have settled, the operation will be smooth and at the same time the exchange rates will settle.
Underestimation can be caused by any event, if there is no other reason than belief, you can make a serious exchange rate gain from it. However, the price of an overvalued stock can be reset at any time.
Does the company have a sustainable competitive advantage?
Why would you buy the products of that company? Why do you choose it?
It can be either a very strong and well-built brand, but even a technological advantage that is very difficult to catch up with.
Competitive advantage ensures that the buyer wants to buy from him. Think e.g. to Coca-Cola. The manufacturing company knows exactly what it is and why it is strong. So if you start a cola factory, you won’t be able to scare Coca-Cola Co. much. After all, even Pepsi doesn’t always get it. If it didn’t have such a competitive advantage, anyone could take customers away from them at any time, and at the same time take their livelihood. This, of course, would also have an effect on the exchange rate.
Who are their main competitors?
Competitors may still be tiny, but if they are developing more dynamically than the company you are looking at, you can make more profit through them. Not to mention that if the company doesn’t switch on time, emerging competitors will very easily bring in the competitive advantage already mentioned above.
How has the company performed in the past?
Of course, this is not about looking at stock prices. After all, past exchange rate movements are for information purposes only.
Look at the actual economic activity of the company and the result achieved in it (eg balance sheet profit, operating profit, other indicators). If there has been no major change in the company and its operating conditions, it is expected to perform similarly in the future.
Is the company profitable?
If you are already reviewing your accounting balance sheet, take a look at their profits. The issue is not a single year, after all, closing a year at a loss can also be a natural result of a more breathtaking development. This is related to the performance mentioned above. If you’ve seen so far it closed with losses quite often, even with increasing sales, you may want to treat them with caution.
How stable is the company financially?
It may be profitable, it may perform well. The question is, does only the year-end balance sheet look good, or does it look nice during the year?
Tight liquidity can be a source of problems, even with profitability. In addition to the current payment difficulties, the company may still be profitable overall, but then the problem may easily spill over.
How much credit does the company have?
Here, of course, the question is not whether you would be able to repay that loan yourself. Overall, look at it in terms of revenue and fixed assets.
An aggressive financing strategy provides an opportunity for a company to grow faster. A loan has to be disbursed even when revenues are either lost or just delayed. A company with a high loan portfolio risks going bankrupt in the event of a crisis.
Who runs the company?
Investors love stability. And this is the easiest way to achieve this with experienced and competent management. Who controls the company whose shares you want to buy? What is the willingness of the risk taking, what direction does it represent in management, how open is it to innovation? These are all crucial factors in a company’s future performance.
Were there any bad news about the company, its managers or other employees?
The media loves bad news, juicy stories, and there are people everywhere who may have made a bad decision only once in their lives. This man is not necessarily in a leadership position, can be anyone. That is why the question is not whether there is any bad news about it, but what bad news there is.
It does matter whether the headline appears to be that ‘the middle manager of company XY caused an accident: he struck a leap deer’ or ‘the entire management of company XY was arrested for high-value tax fraud’. I hope the difference is clear.
In the event of very negative news with poor PR value, the company may decide to dismiss management. Even if that act was not against the law, it was “merely” unethical. And until the new staff integrates, the company’s performance may decline. Coupled with the above (e.g. high loan portfolio, not too much competitive advantage), the performance of a company, and thus the value of its shares, may be delayed for years.
Questions:
- What areas do you look / review in addition to the above before deciding to buy stocks?
- Do you do this yourself or do you ask for professional help?
- Reviewing the above, how can you predict the future performance of a business?
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