Smart Stock Picks - Smart Stock Investing
When trying to pick stocks there are a number of factors and questions you should ask to help you try to determine how to assess the potential of the stock. Below are some of the key questions you should ask.
1. How does the company make it's money?
Most companies will make their money by selling either a product or a service. In order to fully understand the potential of a company you should fully understand just where it's sales revenues come from. For example many small investors own Apple stock. However how many of them know what proportion of the company's revenue is derived form selling computers, ipods and mp3 files?
2. Are the cash flows sustainable?
Every product has a life cycle. In general terms this describes the volume of sales a company would expect from a product over time. Initially sales will be slow. Once the product takes off sales should pick up to their maximum before eventually the product becomes obsolete and start to diminish until the point when the company is no longer making money form the product so withdraws it.
Obviously there are other facts that can affect a products future profitability such as competitors. If competitor firms are able to enter the market quickly and cheaply with a rival product and out market the company then it's future cash flows may come under pressure.
3. How much working capital is required for the the business run?
Some industries such as mining require huge initial capital investments in infrastructure and facilities before there is any chance of making even a dollar. By contrast a business consultancy firm will require much less capital to begin trading. When analysing any firm to invest in you should look closely at their capital requirements and see if they have enough spare cash to continue to operate. After all the majority of business failures are profitable firms, they just do not have the cash flow to operate.
4. Is the company over or under valued?
From an investors perspective a firms value will be derived by multiplying the stock or share price by the number of shares in issue. This value is often referred to as the market capitalisation. However there are other ways to value a company by simply working out the value of it's physical net assets, by trying to calculate the net value of the companies future cash flows r even by extrapolating future dividends and growth from historical data. By comparing these valuations an trying to objectively estimate the future prospects of the company you should be able to form a good picture about whether the company is over or under valued.
