1. Financial performance
How a company manages its money says a lot about how it will withstand stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition 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 sheetBalance sheet A financial statement showing a company’s assets, debts and how much money shareholders have invested in the company as at a certain date.+ read full definition show that it has enough assets (or current assets) to cover any short-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition debts (or current liabilitiesLiabilities What a company owes, including money, goods or services.+ read full definition)? If a company is short on cash, this may be a warning sign.
- How does the company plan to repay its debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition?
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 statementsFinancial statements Reports that sum up a companys financial data and tell you how it is doing. The four basic statements are: the statement of financial position (balance sheet, statement of profit or loss (income statement), cash flow statement, and statement of changes in equity.+ read full definition and prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition to find out if it’s making or losing money and whether it has been growing. The shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition 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 investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition 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 reportAnnual report A financial report that a company prepares for its shareholders each year. Includes a balance sheet, financial statement, auditor’s report, and information about the company’s operations and financial situation.+ read full definition. 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 stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition’s price.
5 questions to ask
- Does the company have a good track record?
- Does it have the potential to grow?
- What can potentially affect its future?
- Does the management team have a successful track record?
- What is the company’s dividendDividend Part of a company’s profits that it pays to shareholders in proportion to the total number of shares held. The Board of Directors sets the amount. For common shares, the amount varies. It may skip dividends if business is poor or the directors invest money in things like new equipment or buildings.+ read full definition history?