Before investing in a company we have to inform ourselves about the business area it belongs to, taking into consideration the factors that stick to that area and to the macro-economical environment. Let’s briefly review some selecting methods and norms.
1. Business Area – when referring to this we must reflect upon four aspects that appear in its sector:
– Competition: It always helps to know how much of the market our company has and if it has or not an advantage that can make it superior to others.
– The customer power: How much does the company depend on customers? Could a customer buy a concurrent company to integrate production?
– If the products being offered by the company are threatened by the state, society or some kind of substitute goods that might exist on the market.
– If hurdles exist on the market area the company has placed its business in.
2. The structure of share holders: Companies that have most of their shares on the stock market should be preferred. This is because there will be more liquidity in such stocks and in times of crisis one will not be “stuck” with these shares.
3. Financial performance: You should watch the growth and efficiency indicators over a relevant interval of 3 to 5 years of that company and of its peers. Also it’s important to know the debt if any, the health of the transactions, and the cash balance variable factor.
4. How is the company evaluated by the market? – To correctly answer we have to look through three further factors: – The P/E Multiple of a stock, notion that has as theoretical interpretation the number of years in which the starting costs are paid back with the profits.
– The price/book value which generally depends on the efficiency of the company. – The dividend yield that only occurs when we are talking about companies that give their shareholders dividends for every share.