While a professional investment planner can help you to navigate the murky waters of investing, it is always a good idea to take the time to do some investigation on your own in order to better understand whether you are making sound investment decisions regarding your portfolio.
Never make an investment in a company unless you have first analysed whether the cash flow of that company is sustainable.
Just because a company is doing extremely well today does not mean they will be able to sustain that kind of profit and growth over the next five, ten or twenty years. If there is a shift in the competition, how will that affect the stock you are considering? Believe it or not, at one time, typewriters were a hot commodity.
Would you invest in one today? Probably not and the reason is that changes occurred in the competition that allowed more advanced products to take the lead. Be sure whatever company you are considering has the ability to withstand any changes that may occur.
Always make sure you know how much capital the company needs to operate because this can make a major difference in the bottom line profit. Overhead always detracts from profit.
It doesn’t matter if a company produces more gross income than another company if their business capital requirements are so extensive that it reduces the net profit. Don’t allow yourself to be seduced into an investment without knowing the whole story.
Take the time to find out the company’s strategy regarding shareholders. The best investments are made with companies that have a shareholder-friendly attitude.
Companies that are more interested in expanding their business won’t be as likely to create wealth for their shareholders by buying back stocks to increase returns among investors. Understanding the philosophy of the company’s management will help you to better understand what you can expect.
Finally, ask yourself whether the price is attractive in terms of price to earnings when compared to other options. Just because the price looks attractive doesn’t necessarily mean it is when you calculate out the price to earnings.
Let’s say, for example, a company is reporting earnings of £5 per share. The price per stock is £50. This company is providing a price to earnings (p/e) ratio of 10.
Another company is also shares for £50 each; however, this company has reported earnings of £10 per share, reflecting a p/e ratio of 5.
Obviously, the better opportunity lies with the company with a p/e of 10, even though both companies have the same stock price.