How to pick a company to invest in?

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Australian Economy, Macro Economics

Picking a company to invest can begin with adopting multipronged approaches including an industry specification and sector focused approach in line with the target an investor may want to achieve. The bifurcation comes through looking for growth or income, and whether a company under investigation has a competitive advantage in its sector or sustainability in the market to generate dividends through a volatile phase. Picking a right company sometimes may entail some bit of a risk, but lower the risk, more profitable can the company be.

Not just the fundamentals but also technical aspects and financial performance of the company come into play while picking a company for investment. The first step to actively picking out a stock from the sea of available alternatives is to determine what the purpose of one’s investment is in line with how one wants to shape up the equity portfolio. Anything can happen today, but in the long run, stock prices tend to increase when companies are making more money, which usually starts with growing revenue. Revenue is correlated with the “top line” of a company and difference between revenue and expenses is indicative of profit margin. A company with growing revenue but reducing costs will have expanding margins to yield better bottom line levels.

For companies that are linked to good income streams, return on investment is like a steady phenomenon over years; however, investing in an early-stage startup which may emerge as a good growth stock, returns may come gradually. From an investment point of view, private company needs a funding from angel investors, and then comes the savvier investor which funds the companies from the perspective of growth. Thus, looking at the type of funding streams the company has, one can evaluate the strength of cash backbone and whether the company is borrowing an unusual amount of money against peers in view of the industry perspective. Overall, debt position is a key aspect to look at.

When looking at stocks that can be good source of income, dividends and cash payouts can indicate financial health of the company. The operational highlights, future growth opportunities and a general industry overview gives an ease to investors to determine which companies are most attractive based on the presented information and can keep on paying dividends over time.

For example, picking a company from 2 Real Estate related entities for income can be a tricky situation, and one can look for factors such as dividend payments, price/earnings scenario and return on equities with a gaze at financial performance and outlook to evaluate a better bet. For instance, it will be a close call on selecting between Scentre Group (ASX: SCG) and Arena REIT (ASX: ARF) wherein SCG has a dividend yield of about 5.59% while the latter has a dividend yield of about 5.76%. While ARF has great projects in pipeline out of which 17 are expected to be completed in FY18 and one project in FY19, SCG has strongest performing centres with 8 of the top 10 performing centres in Australia. Both the groups have demonstrated good financial performance.

A diverse stock of choice is Spark Infrastructure (ASX: SKI) that reported good growth in FY17 earnings and has reaffirmed the distribution guidance for FY18, subject to business conditions, of 16.0 cps, which represents annual growth of 4.9% over FY17 figure. With an annual dividend yield of 6.72% and utility sector potential, it could be a good stock to consider. Then with the return of favorable commodity price scenario, mining stocks are gradually becoming market darlings once again.

All in all, the key thing to vouch for is keeping a good screening methodology in place to pick stocks as per the portfolio landscape that an investor may want to design.


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