A good business is a business which you can more or less predict with confidence that over the long term, its going to increase its earnings, its profits every year.
As a result, increase in shareholder value and hence the share price. In
other words, the share price will go up not because of speculation but because the company is worth more.
Look at past historical performance. If you look at a company records for the last 10 years, and if earnings have been increasing steadily and consistently, then its more likely they continue to do that in the future. Its not a guarantee, but it’s more likely to do so.
Rather than a company who has had erratic profits in the past, look for a company which is consistently increasing in earnings.
The next thing is to look out for is the USP or unique selling proposition. It’s the same for private businesses, same for listed companies. Does the company have a strong unique selling proposition that gives it a competitive advantage?
That when even if rivals and competitors come in to cut prices, they can maintain their margins because they’ve got a unique positioning. The unique positioning could be due to a patent they hold. It could come from the brand they have.
Take for example, Nike. If 10 other companies were to start and compete with Nike and they come up with a brand called Niko, instead of Nike. Will Nike lose all their market share? No, they won’t. Why? Because people buy because its Nike. Because it’s a USP.
One question to ask yourself, “Does this company have room for growth? Can it continue to grow? Are there new markets it has not explored yet?”
So lets say it’s a fantastic education program that has been working in the States, could it work in China? And that gives you growth prospects. Does the company have conservative debt financing, alright. Can it pay back all its long term debt in 3 years?
The next thing is the management that’s in place. For the management, do they hold a lot of shares in the business? If they do hold a lot of shares in the business, they are more likely to hold a vested interest in making sure the company works, rather than siphoning off money for their salary which could happen.
Here’s a final tip, a company can make a lot of money in profits, but you may never see the profits, because it is channelled back to sustain current operations to renewing and refurbishing plant and equipment.
So I always advise investing in businesses where, in which you they don’t have to maintain plant and machinery. Take for example, insurance businesses. Another example, Nike, doesn’t even own their factories. They own the brand.
These are some of the key pointers that you can follow to choose the business to invest in. May it help you to picking the right investment!
By: Adam Khoo
Posts Tagged ‘Earnings’
Financial Freedom – Run Your Money Like a Business
November 18th, 2009
If you want to be more financially secure, or even become financially free, you could learn a lot about running your money from the model that a successful business would use. If your name is Gemma Jones, think of your financial world as Gemma Jones Inc.
A successful business plans out how much money they expect to have coming in for the next year (turnover), then they work out what it’s going to cost to earn that money (cost of sale) then what it costs to run the business (overheads) and what is left is profit.
They pay tax on the profit ** then put part of that profit aside to cushion their cashflow for the forthcoming year and re-invest in the business to grow it, then the owners/shareholders draw out what is left to spend as they wish.
You are the sole shareholder in Gemma Jones Inc, unless you are working as a couple then you are Mr & Mrs Jones Inc, with a 50% shareholding each and equal voting rights on what happens with your joint money. (If not, why not? This is a whole other article!)
The business constantly looks for new opportunities to make more money and they are careful about what they spend, looking for the “return on investment” and how long that will take.
You can probably already spot some significant differences between how a successful business runs its money and what you do with yours — and those differences are what is making the difference to your financial success!
Taking that model and applying it to your finances, you can work out what you expect to earn this coming year (I suggest you look at your net earnings or what goes into your bank), what the costs of earning that money are (travel, clothes, lunches, etc) and then what the overheads of running Gemma Jones Inc are (rent, food, bills etc).
What is left is the profit the place most people fall down financially — they are simply not making enough profit!
Once they have paid the costs of going to work, running the house, then paying for all the bits and pieces that they think they need to be happy, there is just no money left for the important stuff. And this is where most people go wrong , because they are not taught to run their money like a business.
I know, because I ran my money like that for about 40 years of my life too. Even now, I know many business people who don’t run their personal money in the same way they run their business money.
If you ARE making a profit after paying for your day to day life, then ideally some should be put towards cushioning your cashflow against potential changes in the market next year (savings) and some should reinvested in growing the business (you!) and creating new income flows. Learning new skills, investing in property, starting a part-time business on the side of your day job.
Before you take any personal drawings, to have fun with, as a shareholder in your business. For example, refurbishing the office (your house), or taking the staff (you) on holiday.
Like any business, you should always be looking out for opportunities to increase cashflow and profits, because those extra earnings can be put towards buying, what we in The Money Gym call “income producing assets”. Similarly, you should always be looking for ways to cut overhead, without affecting quality and almost as important, quality of life.
Because you are your business, and you are your main asset. You need looking after.
The more of those income producing assets you can invest in and accumulate, the quicker you can become financially free, as the income from your assets outstrips what you need to live on.
And that’s the day you never have to work again, if you don’t want to.
Because you are financially free.
By: Nicola Cairncross