Our ability to identify patterns provides us with a sense of order and clarity, in situations where we can’t find a pattern things appear chaotic, probably even intimidating.
Over the past few weeks, I have been posting theories about business analysis and how they influence investment decisions. Each post provided a suggested step for investment analysis; for today’s post, I will unite them all on this page. This is a 4-step compilation on how to select a business to invest in.
- Estimate Growth and Returns
- Find out what the business is worth
- Scrutinize the business using financial ratios
- Scrutinize the business using non-financial factors
1. Estimate Growth and Returns
Growth and returns are two of the most commonly used terms when talking about investment and in many cases, they are used interchangeably. With these estimates, you can proceed to estimate what a business is worth below. Additionally, you can use these estimates to compare two or more companies to see which provides the best benefits for your investment.
Find out more! At: How to estimate the benefits of investing in a company.
2. Find out what the business is worth
Your next course of action is to ensure you are getting the best possible deal for the slice of the business you are about to purchase. Like any other market, the stock market is influenced by demand and supply which means it’s assets can be overpriced or underpriced.
Find out more! At: Everything you need to know about the intrinsic valuation of shares.
3. Scrutinize the business using financial ratios
Following the steps above, it is important to acknowledge that these are just estimates and it would be nice to back them up with some sort of reassurance, so you can be more confident in your decision. Conducting further analysis by using financial ratios helps to provide that reassurance. You will scrutinize the company’s existence and stability, as well as its ability to consistently generate profits. With these answers, you may then review your chances of getting the benefits you crave.
Find out more! At: Start with what you know: A Beginner’s guide to making stock investment decisions.
4. Scrutinize the business using non-financial factors
A business is not just numbers; it can be influenced by customers, government, competitors, management, shareholders etc. Therefore to fully understand the strengths/weaknesses of a business you should understand how the business interacts with its people and how successful they are in each relationship.
Find out more! At: How to identify high-quality business without doing math.
With these four steps combined, you are now equipped with enough knowledge to decide on buying/selling/holding and investment
Disclaimer:
The information on this page and anywhere else on this website are investment theories, not individual investment advice, therefore their application or otherwise is up to your discretion.
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