Factors of a Company that can make a Good Investment

Factors of a Company that can make a Good Investment

Amazon stock price

Perhaps the most important aspect of achieving investment success is having an eye for a prime opportunity. Part of the reason around 70% of all CFD accounts lose money is because of inexperienced traders making investments without understanding the market trends and stock behaviors. There’s a lot more to a smart investment than just an upward price trend…

A photo of a phone displaying the Amazon stock price

In this section, we’re going to detail exactly what *we* look for in a company, before investing. This is not in any way professional advice, but a checklist written out of personal experience, with accrued knowledge and years of winning/losing investment decisions; shaping our views on what constitutes a clever bit of business.

The question we ask before committing to an investment:

What do the financial statements look like?

A company that has a poor financial statement gets an immediate ‘NO’ from us. We generally look for safe investment choices that have just suffered from a market downturn, so if things don’t add up on the statements, then it fundamentally goes against the way that we invest / trade.

The factors we look out for in a financial statement:

Net debt

As a general rule of thumb, we don’t tend to invest in a company that has a net debt of more than 5-10x the companies net profit. This ties in with what the company is/does as they may just be starting out and the growth rate could be accelerating at astounding speeds.

Net profit

Essentially how long would it take to pay off said debt, if consistent progress is being made you may want to consider investing long term

Earnings per share

In its literal meaning; How much of the value of the shares is returned as earnings and how much is waste/overheads?

Price to Equity Ratio

Generally speaking, a high P/E ratio suggests that the market is expecting stock growth. However, we do make exceptions for the odd business that has a very well defined business plan and set of products.

Why would this company be any more successful than other similar companies?

Think about the future profitability of the business in the context of its industry/sector. Would investing in a small growing oil company be any more fruitful than investing straight into Shell or BP?

How is the rest of this sector performing?

Similar to the last point, would this investment be a smart long term move with the general shift towards greener energy? You may have found the most profitable stock in the sector, but if that sector is in decline you should consider whether the investment is a smart one.

Is it hitting all-time lows or is it hitting all-time highs?

Stock behavior is everything. You don’t want to bet too much on history repeating itself, but it’s a sure-fire way to get a clear indication of what type of performance to expect in the near future. 

Keep up to date with the news

Always keep track of current affairs that may have an impact on the market. Brexit, Covid-19, and US-China/EU trade wars have all been external events that have had BIG impacts on stocks, so keep an eye out for stocks that may be open to being blindsided by global events.

Quartely financial report for Shopify.

These are the prime aspects that factor into our thinking when we invest or trade; it’s key to remember that you’re risking every penny you invest when making these decisions. Having a clear idea of what to look for definitely helps you avoid sure-fire losses, but it’s also important to keep in mind that you won’t be right 100% of the time. 

Tags: ,

20 Responses

  1. Karl-Heinz says:

    This is a very interesting and promising approach. Good luck!

  2. warren levein says:

    Wonderful very informative with professional advice. wishing the creators every success !!!!!!!!!

  3. Sarah Bailey says:

    This is really interesting I have to admit I don’t know too much about investing, though I do have a couple of accounts that auto invest for me, I should really find out more about it myself.

    • We have a whole section of our site dedicated to helping beginners get all the information they need before starting out! Be sure to check in regularly if you’re looking to find out more 🙂

  4. rhian westbury says:

    I want to learn more about investing as it’s something I’d love to do long term for my future x

    • We’ve started a series of blog posts to help learners get to grips with the basics before they start out; check back in with us over the next couple weeks to learn more!

  5. Jenni says:

    This sounds very interesting, I have no idea about investing but it’s something I really should look in to.

  6. Kristine Nicole Alessandra says:

    I leave stuff like this to my husband. He is more competent with financial matters than I am. We have invested in Treasury Bonds, but my husband is also looking at other investment options right now. We don’t want to be old and gray and penniless, so planning well is always a good thing.

    • Planning ahead is always the best idea, it’s never too early to start thinking about your future! There’s a ton of investment options out there right now, we’re going to be covering them in our investment series of the coming weeks 🙂

  7. Some excellent information, investing is always spmething I’ve wanted to do but struggled to understand where to start and what i should be looking for, great post

    • We’ve got you covered Liam! If you have any questions in particular – feel free to let us know, beyond that we’ll be releasing a series going into the basics so keep an out eye out for that.

  8. Kira says:

    I haven’t a clue when it comes to things like this but I am always fascinated. A really great read 🙂

  9. Kara Guppy says:

    I have never thought about investing in a company. I tend to rely on stocks and shares, although that isn’t paying off at the moment

    • Stocks and shares is a great way to invest – a volatile market is a breeding ground of opportunity, you just need to know what to look for! Some stocks have grown by 2-3x in the last 3 months, so it really is a case of learning and gaining that knowledge.

  10. Ashleigh dougherty says:

    There’s some great tips here, which I’m sure will be very helpful to some people 🙂

  11. I’ve never considered investing before, its always seemed like something that only those with lots of money do. This post has given me a little more confidence to look into it.

Leave a Reply

Your email address will not be published. Required fields are marked *

Follow by Email