6 things to know about a company
Before you invest, make sure you understand the company's business and its products or services. Find out whether the company is making money or losing money, and why.
1. Financial performance
How a company manages its money says a lot about how it will withstand stock market changes or unexpected events. Here are some questions to ask:
- Has the business been up or down in recent years?
- Is it making money or investing wisely in its future?
- If the company is losing money, are there signs of a better future ahead? Will it borrow to drive growth? Issue new shares?
- Does the balance sheet show that it has enough assets (or current assets) to cover any short-term debts (or current liabilities)? If a company is short on cash, this may be a warning sign.
- How does the company plan to repay its debt?
2. Company’s track record
Does the company have a history of solid, steady growth? There’s more risk if it’s a new company with no track record. Look at the financial statements and prospectus to find out if it’s making or losing money and whether it has been growing. The share price of a company with a good track record of growth over many years may be more likely to increase in the future in a steady way. Does the company have the potential to grow?
You likely won’t find a lot of history if the company is privately held. That's because privately held companies aren't required to disclose information about their business activities. Contact the firm directly and ask for the information you need.
3. Business costs
Take a look at the company’s operating statements. Have the costs of running the business changed? If costs are going up while the company’s sales are not, it may be a warning sign.
Do the directors and other company officers have a solid track record of success? What is their management style? Has company management changed often, or abruptly, in recent years? Look for stability in management, and for leaders with strong backgrounds in the industry and a good record of success in other companies.
You should also find out how management is compensated. Do their salaries seem reasonable compared to how the company is doing? How much of the company do the directors and officers own? Have any directors ever been in trouble with regulators?
Before you invest in a company, find out about:
- the structure of its board of directors and their qualifications, and
- its governance practices.
5. Risk factors
Find out about factors that could potentially affect the company's performance and its future growth. You can usually find out about future risks by reading the management's discussion and analysis (MD&A) section of the annual report. For example:
- Is the company trying something new and untested? If yes, who are its competitors and how successful are they? If other players are more established, this company may have a tough time breaking into the market.
- Are there signs the company will need financing soon? If so, what are its plans for raising funds? If the company borrows money a lot, it may need more money again in the future.
6. Dividend history
Good dividends with regular increases tend to mean a healthy income stream for investors. Also, if the overall market drops, dividends help to support the stock’s price.