A primer on evaluating a company

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A primer on evaluating a company

You want to make sure that your investment choices are sound, but how can you make sure that your decisions will result in a gain? Between the vast range of options and the often mind-boggling factors that affect not just your specific investment but also those that affect the economy as a whole, picking a company to invest in may seem like an impossible task. It doesn’t have to be. Really.

“Even in the most dire economic times, certain factors will always be the major indicators as to whether a company is and will be successful,” points out Richard Cayne of Meyer International.

This article will explain some of these factors. More detailed discussions will follow in later posts. These factors can be split into two broad categories:

How is the company run?

  • Management team: Who is running things? Is it a hedge fund or private equity firm looking to make a quick buck before liquidating? Or is management made of industry leaders or innovative thinkers with proven track records? Can the company keep hold of their upper management, or does it seem like there’s a revolving door to the top floors?
  • Competitive advantage: Does the company have an edge of some sort over competitors? This could be anything from proprietary intellectual property (think of pharmaceuticals that do not have generic equivalents) to market penetration (think of a company like Coca-Cola or Pepsi that may have market domination). Is bigger better, like Coca-Cola or Pepsi, or is a niche product or service a better option (Uber or AirBnB).
  • Market leadership: How well is the company doing compared to its peers? You could focus on just the major players, such as Apple and Samsung in the mobile device sector. Or you could consider companies that may not have a large market lead right now, but that you may think are well placed to capture market share from current leaders. For example, if one major car manufacturer suffers a massive recall, what competitor is in line to fill any gaps?

What is the company worth?

  • Revenue: This represents how much money a company made, before subtracting any liabilities. You could consider it as the total amount a company sold, but often, this number will include income from transactions outside a company’s regular course of business (an insurance claim, lease income from subletting, etc.).
  • Earnings: This is a company’s net income after taxes. It’s often considered the main financial indicator of how a company’s financial performance. And it is the basis for other financial indicators including earnings per share (what portion of earnings are attributable to each share) and price to earnings ratio (actual share price divided by earnings per share).
  • Fixed assets (PP&E): Also known as plant, property, and equipment, this is the value of tangible things a company owns. When evaluating a company, you need to look past just money in and money out. What a company requires (factories, equipment, land, etc.) to conduct its business could also be counted when calculating its worth.
  • Intangible assets: In addition to physical items that a company can count as value, there are non-physical or intangible items that may have great worth. This includes intellectual property such as trademarks, patents, copyrights, and trade secrets (think of the pharmaceuticals mentioned earlier) as well as brand recognition (think of Coca-Cola and Pepsi). Although this is harder to calculate, it is an important aspect to how a company functions and whether it will succeed.

Where to find this information and what to do with it

For publicly traded companies (and some private ones looking to raise capital through other channels), this information can be gleaned from annual reports. But in this information age, there are plenty of specialized blogs and news sites that offer their own analysis and opinions on a company’s outlook.

Please consider that these are some of the simpler terms that you should understand, but there are others you may want to become familiar with. “But you don’t need to have an accounting or finance degree to be able to judge a company’s worthiness,” admits Richard. “However, you should have a basic understanding of what a company reports and how it is analyzed by the markets so you can make good choices.”

To continue this conversation, or to discuss any other financial matters, please contact Richard Cayne at Meyer International.


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