There’s a saying that gets thrown around a lot – invest in what you know. It doesn’t sit well with me because if I only invested in things I know I wouldn’t invest in anything. I prefer it stated as “know what you invest in”, that it take time to get an intimate knowledge of the things you invest in. I prefer it this way because it encourages us to find out things about companies we want to invest in, as it should be. There’s a lot to know about a company but for beginners, I’ve picked a few items that are essential knowledge about a company you want to invest in or are already invested in.
Stock exchange-listed companies have a known reporting date or year-end. This is the point at which they close accounts and create full-year reports. A reporting date doesn’t seem like much of a big deal but there are a few reasons why you should be well aware of this date. Firstly, because of the cumbersome task that is compiling financial reports to accounting standards and having them audited it takes some time for reports to be published. The ZSE listing rules give companies 3 months to publish reports but we have seen this relaxed in light of Covid-19 related complications. This 3 month period is known as the closed period and is usually characterised by a wait and see attitude in the market. Price jumps tend to happen around the announcement of results so most investors do not at the very least dispose of shares during the closed period. In addition to the FY reporting requirement, the ZSE rules also require a half-year update and encourage a quarterly update. You can derive the quarterly dates from the FY date. These reporting and update dates represent moments of opportunity if you are confident in a company and its performance.
Business model and units
Companies are after all vehicles for businesses. I like to tell people to buy good businesses and that means knowing the business model and business units of the company. How do they make their money? What markets are they in? What percentage of their revenue comes from which business segment? It is commonplace in modern companies to have multiple business units in sometimes completely unrelated industries. In those business units, you need to look a little deeper and understand how they make money in the business. TSL, Ariston, Hippo, SeedCo and Miekles are all in agriculture but they are not in the same business or doing business the same way. Understand the business model to know what means good news and bad news for the businesses behind the company.
Corporate Governance history
Corporate governance is like sleep. A good night of sleep goes unnoticed. It is when you have a bad night of sleep that you really appreciate the value of a good night’s sleep. Good corporate governance for the most part goes unappreciated. Its presence usually leads to things going as planned or at the very least uneventful. It paves the way for good business performance but cannot be directly linked to the good performance. Poor corporate governance on the other hand will show up and show out. So knowing the corporate governance history of a company will give an idea of how stable this part of the business should be going forward. This is not just about board and management appointments. Also, look at their reporting history and other ethical issues.
This is not definitive of how good an investment a company is. However you may find it useful to know who your peers are going to be in an investment. To borrow from the previous point about corporate governance shareholders are a very big part of that particularly when they wield a lot of voting power. So knowing the top investors in a company gives you some idea of the possible approach to governance. Where shareholders have a large enough holding they can go as far as influencing board and management appointments, sometimes a good thing sometimes a bad thing. At this level most companies will have institutional investors in their top shareholding but remember not all institutional investors are created equal.
Director dealings must be declared according to ZSE rules. This is when a director in a company buys or disposes of shares in the company. Even where the shares are bought through a company or other vehicle in which the director is an ultimate beneficiary they must declare and disclose. Director dealings are said to signal director confidence in a company. The thinking is someone close to a company has performance information. Director dealings are not, in reality, immediate indicators of improved company performance but it is certainly a good sign when directors tie their fortunes together with those of shareholders.
Price Earnings Ratio
Being someone educated in finance I am familiar with and do look to the technical side of analysing companies. While I’m quite comfortable with the many ratios and metrics used when asked which is most important I will always point to the price earning ratio. You can read here to get a detailed understanding of the P/E ratio, for now, what you need to know is that the P/E ratio tells you how expensive a company’s shares are ie, the P/E ratio tells us how many dollars we are paying to generate one dollar of earnings. You want to keep an eye on this as it changes from time to time.
These are not the only things you need to know about a company when you invest in it but if you can call these things off the top of your head or have them available for quick reference in your diary you are a step ahead.