How To Evaluate A Company For Investment?

Making an investment in the stocks is quite challenging, particularly when you are a beginner.  Investing in the stocks demand a lot of discipline and research work. You must have an excellent understanding of the various aspects such as the profitability, debt, management, etc of the company before you decide to invest in the stock market. To minimize the risk of losing your hard-earned money, you must carry out a comprehensive research work about the company to get the better returns.

For instance, if you purchase the shares of the Company XYZ and it is making good profits over the next 1-3 years, then you can expect to get better returns. On the other hand, the company performs poorly over the next few years, then eventually the value of the share prices will decline and you may lose your money.

It is no surprise that most the investors, especially the first-timers, take the investing decisions without researching the prominent facts about the company. As a result, they end up losing their investments. Therefore, it is extremely important to research the company before investing. You may be wondering that researching consumes a lot of time and energy. Do not worry as it is not rocket science and a lot easier than you could imagine. You just need to research the following aspects of the company before putting your hard-earned money into their shares:

High Debt Companies

The shares of the high debt companies must be totally avoided for investment. By using the debt-equity ratio, you can quite easily determine the amount of debt that a company is carrying when compared with the amount equity shareholders have in the company. Generally, it is used to analyze whether a company is able to repay its debt obligations in a hassle-free manner or not. As a thumb rule, the companies with the debt/equity ratio of more than 1 are considered riskier for the investment.

Companies with Zero Transparency

There are very few companies in the stock market that suffer from lack of transparency i.e. it is quite a challenging task to find their information online. This problem is most visible in case of the small and micro-cap companies. Researching information of these companies can be quite hard work for the investors. Furthermore, it is tough to ascertain the reliability of the information or there are chances that the data can be manipulated. Hence, it makes no sense to invest in those companies that suffer from a lack of transparency.

Inefficient or Unstable Management

The management of the company is just like a ship’s captain. They formulate the important policies and their decisions define the growth of the company. When you are planning to invest in a particular company, then do not forget to find out about the management of the company. For this purpose, there are few questions that you must ask yourself with regard to the management before taking any investment decision:

• What is the structure of the board of directors of the company and the qualifications of the members?
• Do the members of the management have the desired experience and track record of success?
• Is the management of the company changes more often, if yes, then what are the reasons?
• How the decisions of the management affected the company?
• What is the financial net worth of the company directors and other members?
• Have any of the directors of the company ever been in trouble with the stock market regulator i.e. Securities and Exchange Board of India (SEBI)?

Companies with Weak Growth Track Record

Before investing, make sure whether the company has a good history of growth or not? The company with the poor or weak track record is considered to be risky for making an investment. For determining the track of the record of the company, you can check out the financial statements or prospectus of the company to find out whether it is losing money or growing continuously. If the record of the company, in terms of the growth, is not good, then it is quite obvious that the share prices may fall.

Conclusion

For the beginners in the stock market, taking into consideration the above important aspects before making an investment will help them a lot avoid the problems and invest in the best-performing companies. All in all, it is important that you carry out in-depth research work and invest in the companies having good or stable leadership and running successfully over the years.

Happy Investing!