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This Company Is Not Investable - Change My Mind

Updated on June 19, 2020

What deems a company as investable? That is what I am going to explore today. But first what can we even invest in… Well we can invest either in a product produced or a service provided by a company. Shark Tank viewers would have a general idea of what would be an investable company and most of them would say sales, sales, sales! Significant sales prove one important thing and that is consumer’s positive response to the product or service. A company’s sales can be a really attractive factor for one to invest but there are plenty more things that we can look at to make a more informed decision.

To know what will sell, one has to look at the nature of where it is being sold – the market. This is known as understanding the market climate. As an investor, we must understand what the global social and economic situation is like and which products and services are most likely to have a demand, a growing demand. A company that is on the path to long-term success will definitely focus on its target group and try to modify their products to suit their consumers better. They will try to understand their market and make the necessary changes, unlike those which ride off the profits without reinvesting into greater innovation and development of their existing products and services. Hence, it is important to know if a company truly understands its target group.

Investing in a company is like investing in a child. You want it to be long-term. You cannot determine how a child may turn up but you can determine how a company can turn out to be. For that, you would need to look at the company’s long term strategies and vision. The driving body of a company should have realistic plans and be able to think ahead on what would be a good approach to improve their company. Sometimes, for this to happen, short-term sales may drop but one must ensure that the company has enough cash flow to sustain this drop in sales revenue. Failure in ensuring cash flow is a representation of the failure in leadership and planning of the company and this can be considered as a warning sign. Insufficient cash flow will lead to the company to incur debts to finance itself. While avoiding debt completely is impossible, a company must aim to have a low debt to equity ratio. Debt to equity ratio compares the company’s debt in relative to its assets. A lot of debt can be used to finance growth in a company but the increment in income from this growth must cover the debt and allow the company to be profitable. Hence, the company’s long term strategies must be taken into account, especially the methods they have chosen to achieve growth.

Another thing to note would be scalability of the product or service the company is providing. One should know about the current production costs, distribution methods and infrastructure of a company and whether changes to the operations of these intermediates in producing the product can allow the company to be able to attain higher profits. For example, Tom makes lemonade from scratch using a secret stirring technique passed down from generations whereas Johnny uses powder from sachets to make lemonade. In terms of taste, Tom’s lemonade tastes slightly better than Johnny’s and this leads to Tom having higher sales than Johnny. One who looks at only sales would invest in Tom’s business. However, if you take scalability into account, Johnny’s business has the potential to out scale Tom’s business. This is due to the fact that Johnny could set up more shops and all he needs is to get more sachets and mix them with water. He could hire staff who can sell this lemonade. However, Tom cannot scale the business as his business is not lemonade but himself – his stirring technique! We cannot duplicate more Toms to setup more lemonade shops. Therefore, scalability is important when deciding if a company is investable.

In short, I feel that these are some of the important points that I would consider when thinking about investing in a company. The sales show customer response, addressing the target group shows the company’s commitment and understanding of the market climate, the debt to equity ratio shows the success rates of its long term financial planning and strategy and the infrastructure shows it scalability. There are plenty more things you can consider when determining on whether a company is investable or not such as their involvement in green technology etc. At the end of the day the investment is going to be part of your portfolio and you know what they say, it is better to spread out your portfolio across industries to spread the risk so that the day one crumbles down, the other still stands.

Source

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

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