Sunday 8 April 2012

Traits of Good Companies

 "Stocks do well or poorly in the future because the businesses behind them do well or poorly - nothing more, and nothing less."
[Some famous investor said this phrase, you know who? I hope you know :)]
  • Cheap Valuation - P/B, P/E, discount to NAV etc
  • Business Economic Moats - high barrier to entry, unique product(s) or service(s) such that the company will always be needed and still be around for decades
  • Growth - sustainable consistent growth
  • Profitability -  ROE, ROA, increasing FCF NOT net profit only, net profit margin
  • Financial Health (net cash or little debt, unless company got high earning powers to offset)- see gearing, debt to equity, quick/current ratio, interest coverage ratio
  • Dividend - 2-3% p.a. with <40% dividend payout ratio. History of increasing dividend payout ratio over the years as business grow
  • Risks - think of negative aspects of business
  • Management assessment - compensation(executive pay is linked to company performances), character, experience
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Extracted and updated the above bullet points from my ex-page. If you manage to find good companies, please feel free to share :)

4 comments:

Musicwhiz said...

There are many good companies out there, but they may not make good investments.

OT83 said...

Hi MW,

Anything else I should take note of when looking for good companies for good investments?

Hope to learn from you more. :)

Musicwhiz said...

Hi OT83,

Yep! Cash flows.

OT83 said...

Hi mw,

yes! fcf. that's why I wrote.

Profitability - ROE, ROA, increasing FCF NOT net profit only, net profit margin

profit may not mean that money flow into company.

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