As someone who speaks very positively about investing and in particular investing in shares on the ZSE one of the questions I’m asked most is “which companies should I buy”. While I have very strong opinions on which companies are worth buying, they are just that, opinions. As the saying goes “give a man a fish and feed him for a day but teach a man to fish and feed him for a lifetime”. What I share with people who ask this question is a method that just about anyone can use for spotting good companies to invest in. For educational purposes, I will share this methodology today and hopefully teach a few people to fish.
Buy good businesses
The simple truth that is sometimes ignored is that behind every share on the ZSE and any exchange is a business. Share prices reflect the value that is placed on a unit of ownership in the business. The value of a share is the present value of all expected future cash flows. In English, the prices we see on shares are estimates of all the value they will bring us in the future. So in simple terms, the more profitable a company is expected to be the higher the price the shares will attract. Now that we understand this concept let’s look into the top signs of a good business.
Corporate governance is one of those things that nobody likes to talk about but everybody accepts that it is important especially in the company set up. Corporate governance is the system through which the company is run on behalf of shareholders by the board of directors and executive management. So it is very important to look at the corporate governance of a company. Do they have a stable system for appointing executives? Do they attract the best talent? Do they keep talent? Are they discharging their duty to shareholders to keep them informed or are there some issues? One issue which you can find ZSE case studies on is not publishing annual reports.
While the board is responsible for governance, the management or executives are responsible for the execution of strategy. To put it simply we are looking at the people in charge of the company and how well we think they can run the company. How do we know how well they run the company? Where have they been and what have they done? Does the company show an appetite for new projects or products? Is management making decisions that take advantage of the landscape or are they off the pulse a look at how the businesses have handled challenges such as electricity and Covid 19? You can get a clear idea of the capacity of the management in place to perform. Names are great when looking at management but actions speak much louder.
When it comes to customers there are a few things to look at. Let’s try to keep this simple so it applies to as many businesses as possible. A business is a customer, without customers, there is no business. So one of the best indicators of a good company is its relationship with customers. Does the business have a wide customer base? Can they grow the customer base? Can they make more money from existing customers? Can the company retain the customers it has in the face of competition? Revenue can be increased by finding new customers and/or selling more to existing customers.
Key to the questions asked earlier about customers are the products and projects the company pursues. Assuming you’ve been looking at one company as we go through the article and you are satisfied with the governance and management but want to settle the questions on customers this is where you look. Are they pursuing new projects or products? Are these new products and projects what the market needs so much so it will lead to the acquisition of new customers or customers spending more on the company?
Finally, you need to look at the resources available to the business to pursue these new products or projects. Money is one obvious resource we can all think about but there is a lot more to it. Rights such as land or mining rights are a resource. Intellectual property such as a licence to manufacture or distribute a leading product is also a resource. So think widely when considering the resources question.
Armed with this information you will better be able to determine which companies you can consider investing in. The information can be found in company annual reports and updates, announcements ad in the news. Also, consider this list of useful resources for ZSE investors.