The whole point of investing is to put a resource into something that brings back greater benefits than the resource put in. When it comes to stock market investing the resource is money and what we look for is a return on investment through capital gain or dividends. So if you are looking for good companies to put your money into for growth you’re investing. The hard part is of course choosing the right companies. When you invest in listed companies money is at risk because just as values can go up they can also go down. What signs can we look out for that tell us if a company makes a good investment?
EPS growth and other ratios
There’s a whole world of analysis that relies on the underlying business numbers to see if a company is doing well or not. The key number that shows how well a business is doing is the earnings per share. Earnings per share is the earnings (before Interest, Taxation, depreciation and amortisation) divided by the number of shares. We could just look at the earnings (total profit) growth but EPS tells us how much profit an individual share made. We ideally want to see a company that grows the EPS consistently. Other ratios to note are the Price/Earnings Ratio, Dividend Yield and more we discussed in this article.
This may be a sore spot for those who got burnt in the past but the governance of a company is very important. Do they communicate? How well do they communicate? Are they reporting on time or always seeking extensions? Is the leadership stable or do boardroom squabbles dominate the company? Governance isn’t just about reporting but rather the approach of the leadership of the company to all other stakeholders in the company including customers and employees. Is there a succession plan in the company leadership? These are key considerations.
Just to be clear from the outset very few big companies innovate. They are more likely to buy smaller companies or ideas that are innovative and bring that into their organisation. So your favourite Telecomms companies need not have the best-talented developer but rather the ability to see which ideas are going to be big in the future and to move on them decisively. If you’re a regular reader you’ll know that the growth of a business happens through finding new customers, selling more products to customers or preferably a combination of the two. Innovation gives access to opportunities for both of these things.
Expansion is a matter of the above-mentioned factors more customers and more products to customers but how do we get there? New products or projects are an example of this. It’s going to depend on the type of business to see what makes sense. A quick-service restaurant business increasing its number of outlets or a materials manufacturing company adding new product lines are good examples of this. A financial institution adding a way to transact that opens them up to a customer segment they previously didn’t have access to is a good sign as well. Just make sure they have a proven capacity to launch these new products.
Management is all about dealing with complexity while leadership is about dealing with change. If there are two things we can agree the Zimbabwean environment has they are complexity and change. Management and leadership that have shown the ability to adapt to the circumstances both natural and man-made, show adaptability and that is a sign of good investment. Innovation and expansion are all well and good to chase but knowing which things to chase and how to go about it comes from adaptability.
You could (and should) go deeper into analysing companies and you rightly should. These signs discussed here are a start for those who are not familiar with the territory but are passionate about getting invested and doing the right things as they start.