Important Facts To Note: Investing In What You Know (2)

Before investing in a company, even if it is within your circle of competence, the following need to be taken into consideration

In our last post, we spoke about how investors need to remain within their circle of competence while investing. The circle of competence might put you at ease because you understand a little more than the average person about it, but it may not necessarily guarantee good returns.

As an investor, you are not just investing for the sakes of it; rather, you are surrendering your hard-earned cash to become a part of an organization and neither sentiment nor comfort should change that.

After determining the companies or industries that you can understand the easiest and are within your circle of competence, it is important that you take a step further assessing those companies.

Financial Performance

The primary source of information on the company for an investor is the company’s audited financial statements. This gives you a comprehensive view of the company and it allows you compute financial ratios to determine the trends and track record of growth.

- The Income Statement: The first thing you want to determine is how much sales/income has the company been making for the past few years? Is the revenue increasing or has there been a steady decline?

A company’s revenue might not always increase year-on-year, however where it has a steady decline, it might mean that its goods or services are starting to lose market demand and the company might be going out of business.

You are also interested in the net profit to determine how much money is really made after all expenses have been paid. It is also important to compare trends and growth in profit over a period of time.

The profit margin is another great tool as it compares line items like gross profit or net profit in relation to revenue.

- The Statement of financial position (Balance Sheet): The value of the company can be determined at a glance by the statement of financial position.

A common way to find the value is by subtracting the current assets minus the current liabilities stated in a given year. You also want to know if the company has enough assets to meet its short term obligations or if it is slowly becoming insolvent. Can the company repay its debts conveniently?

(See posts on ratio analysis as a tool for measurement).

More specifically, as an investor, you also want to check the dividend history of the company and its price. The dividend history will show you the frequency of dividend payments so if that is your priority, you would know what to expect. The dividend yield is also a priority and this is one way Yochaa can make your life easier.

Rather than move through financial statements of companies dating back to five years, simply find the company of your choice on the explore page.

Business Model

Another thing to note is the company’s business model. It is fine to know how the company intends to increase its profit in its industry and gain more market share. This is the strategy that will essentially keep the company in business.

While there might not be any fixed metric for determining this, you have to agree with methods employed by the company for sustainability. Is it targeting elite customers or it is using mass adverts to attract the masses. Whatever the case may be, you should be worried if the company has no clear business structure.

Value Proposition/ Competitive Edge

Competition is fierce and companies are offering value in different ways to stay in business. Hence, you have to determine what makes the companies in your portfolio special.

If it’s a bank, is it offering its hundreds of years of experience as a market leader or is it a new generation bank that is fit for the everyday person? Ensure that whatever company you are buying into has a competitive advantage that can be capitalized.

__Risk Factors __

You also need to determine the riskiness of the business in relation to the market. For example, if the company’s sole source of growth is based on old methods that technology is slowly eliminating, then you might want to be worried.

If the company’s success is directly tied to the CEO of the company, then you might also be worried about the sustainability of the company in the long run.

All of these will give you a general outlook of what the company is all about and you can choose whether it is still worth it or not.

Written by Lawretta Egba