“Investing is most prudent when it is most business-like”, once said the father of investing, Benjamin Graham. Even though the price of a company is ticking by the second, we should not be affected by it.
As investors, we have to understand that the market is there to serve you, not to guide you. So how do we go about looking at a company? Here are 4 essential questions you need to consider when studying a company.
Is this a profitable business with good returns on capital without using too much debt?
This question signals to us some important points of a great company. First of all, it must be profitable. It should also be able to earn a reasonable return on capital for its shareholders without using too much debt financing. Companies such as Padini Holdings (PAD: MK) might be an example of such a company. It has been profitable for the past 10 years. It constantly earns a return on equity of more than 20% for its shareholders. Most importantly, it has been able to achieve all these without using too much debt.
Is the management team equally and sufficiently talented and honest?
This might be one of the most important yet difficult question to answer. Being a minority investors, most of the time we are not able to influence or even meet with the management. But yet, if we invested in a company with an egoistic and scheming management, it does not really matter if the business is the greatest in the world, we might still end up on the losing end.
What are the reinvestment opportunities of the business?
A company need to constantly reinvesting in itself to generate future growth. If you see a company not reinvesting in its business at all, it might be a warning sign that the company might not be able to sustain its growth rate going forward.
What is the valuation?
Lastly, everything has a price. If something is cheap, we have to understand the reason behind it. Knowing how to value a company is an important skill to have and investors should prepare ourselves with this knowledge before starting our investing career.
Value in Action
Although this might not be the ONLY method to look at a company, it is a quick and dirty step to understand the companies we are looking at and might be useful for us to pick out companies that are worth further research compared to those which we might be better off disregarding.
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All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim do not own any shares in the companies mentioned above.
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