Although we are a company dedicated to day trading, we sometimes like writing on long-term investing. This is because of our belief that traders should also have some money invested in strategic companies for both capital appreciation and dividends.
Before you invest in a company, you need to conduct an in-depth analysis. This is because you want to invest in a good company that is underpriced.
In this article, we will look for the stages every traders should follow when conducting company research.
Identify a company
The obvious first step is to identify a company. There are thousands of publicly listed companies so finding one is a bit challenging.
One way to identify a company is to screen the companies based on a certain criterion. You can find screeners in Yahoo Finance, Bloomberg apps, and MSN Money app. The idea here is to find a company that is underpriced.
Of Course, we have our own screener in Ppro8.
After finding a company that meets your criteria, you should now do a preliminary review of the company. This involves reading the general information about the company.
The information you will be looking here might include:
- company’s management team
- recent news about the company,
- the competitive edge
- the general trends in the market
The latter is very important because you don’t want to invest in companies that are out of favor with the public.
For instance, in an era when retailers are shutting down, you don’t want to be investing in mall REITS.
This is where you look at the company’s financials. It is one of the most important things you can ever do because you can tell a lot about a company based on its financials.
You should look at the income statement, balance sheet, and the cash flow statement.
The income statement shows the company’s revenues and all the expenses. Ideally, you should invest in a company that shows increasing revenues and decreasing expenses.
The balance sheet shows the company’s assets and liabilities. You should chooese a company with more assets and little liabilities.
If a company has debts, you should check at the expiry periods of these debts and whether the company will manage to pay them.
Cash Flow Statement
The cash flow statement shows how the company is using the net income. Ideally, you should invest in a company that has increasing free cash flow.
You want to buy a company that shows huge potential in terms of growth. For instance, the reason why Amazon is an expensive company is because investors are hoping that its many initiatives will bear fruits.
As mentioned, it would be unwise to invest in a company that is showing slowing growth.
After finding a company with increasing revenues, increasing assets, and an increasing free cash flow, you should go to the company’s valuation.
The company might have the best financial figures but be expensive. You don’t want to buy a company that is expensive.
To value a company, you first need to find the multiple that investors are paying for. Here, you should use the Price to earnings ratio, price to sales ratio, and the EV to EBITDA ratio.
Then, you should compare these numbers with the company’s peers. If the numbers are lower than the peers, this is an indication of a company to buy.
But this is not the final step.
If the company is undervalued, you should ask yourself why. Take time and read the recent news and find out why investors are not overly interested in the company.
You can also use the Discounted Cash Flow method to find the company’s present value.
For long-term investing, it is very important to take time to do intensive research. This should take a considerable amount of time to complete.
For traders, all this is not necessary because you don’t intend to own the company for a very long time.