Saturday, February 5, 2011

Tips to Identify Best compnies to invest.

Loosing money is not a good idea whether you are beginner or seasoned investor.
New start up companies has tremendous growth potential but they have risk too. Only 3 out of 10 Start up survives the time and 1 out 1000 becomes Infosys , HCL or Wipro.

Such companies gives awesome returns with time , if you invest in wrong company you may loose all your money.

Lets discuss the parameters which indicates that company is strong and doing good business today and maintain the performance in future.

Common wisdom is cheap stuff may do for short term but in long term only quality will survive.
If you want a shoe with great quality and good comfort,  which survive for 5-7 years buy woodland .
Otherwise you can buy a pair of shoe from unknown brand for 300 bucks also. 300 Bucks shoe may wear out in 3 days or may be in 3 years no guarantee. But a pair of woodland   shoe for 3000 bucks will certainly give you full return on investment.

With experience you can find out shoes in local store for 500 bucks which may last longer than Woodland and give better comfort shoes but if you are inexperienced and can't afford buying a new pair in every 3 months then Buying a Woodland is better.

So lets identify the Woodlands of share markets . We have additional advantage in share market that in recession times you can buy Woodland Shoes in half of their actual price . Recession time is sale period  in share market . Some great companies you can buy on 50% , 30% discount.  

Sign of Good business: Minimum investment , minimum expenses , maximum sales and highest profit ,which increases year after year with increase in sales. General perception is at least 10% increase in profits with 10% increase in sales YoY. If it is less then business is not good.
Since there are companies in similar business with different amount of capital invested , have different sales figures and different profit figure.

Therefore Share market experts defines ratios to compare different size of companies in different geographies and different business.
Some important Ratios are:
ROI : Return on investment
ROE : Return on Equity
Profit margins Ratios

Here is the investment education website which explains all ratios in detail. In Wikipedia also you can find all these ratios.

Don't get scared you need not do all this maths there are thousands of online trading website in your country which will have these ratios for every listed company.
Here is the link for Reliance Industries and some Eastern Sugar

Market capitalization : High  market cap of a company indicates good value of company , presence in business over a longer period , faith of other share holders in company and large sales.                      

Revenues /Sales : Sales is very important factor . Higher the sales higher the profit . Seasoned investor also consider the potential sales in coming year.

Net Profit After Tax : This factor decides the EPS . Companies with High EPS attract many investors , which ensures investor will be ready to pay more price for the company . If EPS is consistently increasing quarter by quarter and year on year over a long period of time then company is a great buy.

There is a catch, sometime company sales their business , assets , lands which contribute in higher net income for a particular year or a particular quarter. It boost the EPS and reduce the PE of company which wrongly indicates that company's share is cheap. When you see sudden hike in EPS check the "Other Income / Income from Other source" of the company.

TIP: Consistent EPS of rupees 5,7,8,10 ,11 for last 5 years at PE 15 is better than
inconsistent EPS of 10,3,9, -2, 15 for last five year at PE 5. It shows the in stable nature of business the company is doing.

Whom do you want to pick for your team Yuvraj singh or Yosuf Pathan or Sachin or Sehwag or Manish Pandey?

Debt of Company : Generally it is impossible to do business without loans , don't always look for companies who has no debts.  Some sectors don't require high investment for expansions but many sectors need loads of money to expand the business and improve the sales . Setting up new refineries , telecom networks building new infrastructure project essentially need loan .
How much loan is acceptable on companies balance sheet , is decided by the business of company and revenue from sales and how much cash company is having in hand.

A company having 5000 rupees cash in hand with per month net profit of 200 rupees can easily justify the loan of 5000 rupees to expand the business. This borrowed money will help to expand business and improve net profit of company to 300 rupees per month .
Bharti airtel took loan of $10 billion (45000 crore rupees) to buy Zain of Africa.Which will improve the sales of company in coming years and increase the share values.

Cash reserve : Apple is the company who is behind iPhone , iPad , itune ,  MAC PC and MAC books has cash in hand of more than $40 Billion cash reserve . In Indian currency in equivalent to 180000 crore rupees.
Bharti Airtel is having cash reserve of  35000 Crore rupees in march 2010 . Higher cash in reserve boost the company's ability to expand the business. They can take loans easily whenever they need.

Market shares : Market share in business is important thing , it is good as well as bad. If there are 10 customer in country for a specific product and Company A is having 8 customers , then there is little scope of sales growth in future however it also indicates the monopoly of A in business . Whenever a new customer comes to market chances are it will directly go to Company A because he knows that A is already have 8 satisfied customer.

Competitors : Nokia was enjoying 60% market share in mobiles in pre iPhone era. After launching of iPhone and Android phones . Nokia's market share is shrinking every day but it is still at 31%. Why because Nokia couldn't launch a products like Android Phones and iPhone .

When you buy Reliance Banking Mutual fund or Kotak PSU Bank ETF , you are not only investing money in market leaders but also in their competitors.

Don't invest in a company which have awesome competitors , unless until it has unique unmatched  product  line. Better to invest in the best competitor.

Average Trading Volume of share : This is important when you suddenly need money , if trading is less in your Company's share then it would be difficult for you to sell them and get money. Higher volume give you liquidity. 

No comments:

Post a Comment