Investing is anything but straightforward. When deciding whether to invest in a business there are a number of things to consider. The financials of a business are a significant consideration, but they’re far from the only concern. Quality of management, global economic trends, public perception of a business, or its regulatory environment are some of the many things to consider when deciding whether to invest in a business.
If you’re thinking of investing in a company, the company’s current financial state and its outlook are undoubtedly two of the most significant things to consider. A business’s balance sheet, revenue, expenses, and free cash flow are all things that provide considerable insight into the financial health of the company.
When reviewing the current financials of a company, it’s important to keep in mind that these figures don’t tell the whole story of whether your investment will ultimately be successful. What matters more than a business’s current financial state is its outlook. Whether the company is making or losing money presently, whether it’s flush with cash or insolvent, is far less important than where it will be one, two, or ten years from now.
To get a better idea of where a company is headed, it’s important to consider more than just the financials of the business. Assess factors like the quality of management for your target company. This is true whether you’re investing in a small private venture or a multi-national conglomerate. At any level of business, it’s important to know that you can trust a company’s managers and that everyone in the organization is well-suited to their respective roles.
Because investors are further removed from management in public companies, considering quality of management especially important if you’re investing in publicly-traded stock. Assess the credentials of upper management. Are executives experienced and capable? Have they been with the company for awhile or do they frequently change employers? Shifting loyalties can be fatal in business so make sure management is invested in the success of the business and therefore your investment.
Beyond the financials and management of a company, you also need to consider where and how the business fits into a bigger picture. The reasons for this consideration are twofold: to determine whether the space the company operates in is poised to do well in the future and whether public perception of the company generally positive.
When deciding whether to invest, you need to step back and look at broader industry-wide trends and determine whether given sectors are poised for growth. You could have invested in the best maker of horseshoes in the world a hundred years ago, but you still wouldn’t have come out ahead. In the same way, investing today in industries like coal – which have developed an overwhelmingly negative public perception – is almost always a poor choice.
If you’re thinking about investing in a business – no matter how big or sophisticated – be sure to keep in mind some of these considerations. They will help to ensure not only that you are investing in the right companies but doing so for the right reasons, and ultimately provide greater confidence that your investment will pay off in the long run. We hope you enjoyed this article from Capstone Financial Planning.
Steven McMeechan is a strategic marketing and communications specialist with over twenty years’ experience in senior marketing management roles across a range of industries including Information Technology and Financial Services. He works for Capstone Financial Planning and lives in Melbourne Australia.