Five must-checks before buying a stock
Agrandville @commons.wikimedia.org
1) Has the company made any profit in the last year
This sounds like a simple test, but this is actually one of the vital organ of a stock. You would be surprised to see how many money-losing companies are out there whose stock seem too good to buy. If you are in for the long haul or really long term , it wont hurt to check the profitability of the company over a fair number of years . If the company has never made a profit .. it would help to stay away from that stock. As always there are always exceptions to this rule. For example, if its a pharma company carrying out its research, you might want to buy the stock to cash in on its profits later.. A word of advice wait till the drug goes to Phase II or just before Phase III trials
2) Where does the company get its cash from
Another one to check is how does the company generate its cash. If there is negative cash , they will eventually need more funding. Be wary of such companies. Sometimes companies sell assets which do not adhere to their business plan and report in their balance sheet. There’s nothing wrong with that and the management sounds to be prudent enough to clean out the weeds .. but there can be another way of selling as well .. selling part of business assets to glorify a balance sheet for the short time.
3) Is there any Insider Trading
This is a no-brainer. If a company’s CEO buys a stock, you follow. Its as simple as that. The CEO has all the information with him and when he parts with his money, he knows its only going to go up. However, you should know, many of these CEO’s offload their stocks and do not stay in the game the whole way like the speculative trader.. You got to follow him when he does that or even before if you have reached your limit.
4) Is the company’s growth consistent
Many of the best run companies have a very consistent rate of growth.If the firm’s earning are erratic, its either in a volatile industry or its being hit by its competitors. Either way, you do not need to buy this one when there are plenty of fish out there to be picked
5) Debt in the Balance Sheet
There is no such thing as good debt. Its either manageable debt or bad debt. If a company’s debt is going up and up without generating much cash, its a doomed business. If the company has a way of dealing with the debts, no matter the amount, as long as there is a revenue model to pay for those debts, it is still a reasonable buy.
So there you have it , my 5 checks before I dive into the market.. what’s yours ?
