Chris was offered an
opportunity to be a part owner of a cyber café with his uncle who decided it
was time to retire and move back to his village. The purchase price was agreed
between both parties and Chris had also taken stock of the assets that he will
soon be taking over. However, Chris wasn’t still done with his due diligence.
Even though he knew the business has basically been in existence for years and
had appeared profitably he still felt he needed to much more.
Investing in shares should
basically follow the same approach. Beyond just relying on fundamental and
technical analysis, a lot more due diligence must be carried out before you
decide to invest in shares. These are examples;
CEO & Management Team:
Warren Buffet was once quoted as saying he invests in companies that can be run
by a stupid person because one day a stupid person will run that company. The operations
of any company are carried out by a management team led by its Managing
Director/CEO. A CEO is one of the most important criteria any investor must
consider before investing. You should make efforts to know who is running the
business, their vision, antecedents and charisma before deciding to invest.
It’s the same thing you would do if you were to vote for a president so why not
do same for a company you hope to be a part owner of. Most failed business or
bad investments have often been a result of bad leadership. A great company is
always represented by a great leader.
Board of directors: The Board
of directors of any company are bestowed with the responsibility of overseeing
the business activities of the company on behalf of its shareholders. This
basically puts them squarely at the helm of affairs in any company. A weak
board is a sign that the management of the company can basically get away with
anything it wants which more often than not is not in the best interest of
shareholders. Irresponsible board of directors can be inimical to your
investments in many ways which is why you must make efforts to identify who the
members of the board of directors are. You should also search online for news
related to their activities and pronouncement in the past. These are clues to
how they have managed the business and indication of how they will continue to
manage the business.
Competition: Before investing
in companies you must ascertain where they stand against their
competition. Is the business in a highly competitive environment? What is the
barrier to entry and how strong is the company’s brand? These are all important
factors you must consider before giving your stockbroker your money. For
example, Companies in highly competitive industries are mostly susceptible to
low margins and low profitability. Therefore, if you invest in a company that
gets easily outdone by competition, the company’s loses market share and then
profits leading to a diminution of your investments. Companies in industries
that have a high barrier to entry may often appear to be uncompetitive and good
for investment. However, that on its own does not determine viability. Such
industries may also be so capital intensive it will take years for it to
break-even making it unattractive for others to join. Whatever the case is,
companies that constantly beat competition year after year and possess superior
products are better investments than others who aren’t.
Brand Integrity: You must also
identify the brand power of the company and its image amongst its consumers.
Businesses that are easily recognizable and known to all find it easier to sell
products and see of competition even in down turns. Companies with strong brand
power can also effectively control price which is a very important factor in
maintaining market share and guaranteeing growth. A company that can
increase the price of its products or services without much fear of losing its
customers to the competition is likely an attractive buy for most value
investors.
Regulatory Environment:
Recently, the Central Bank of Nigeria twice increased the cash reserve
requirement of bank’s public sector deposits. This sent shock waves down the
spines of the banking sector leading the banking index to plunge 18% year to
date in 2014. These are examples of regulatory pronouncements that can affect
industries. It is therefore important for you as an investor to understand the
regulatory idiosyncrasies affecting an industry/company before making that
investment decision. Information such as the law guiding the industry as well
as its regulatory framework, the official in charge and penalties for breaches
are examples of what you must have knowledge of.
Taxes and Incentives: The
difference between the profitability of two companies can often be how
efficient their tax structure is. For example, Dangote Cement has posted over
N400billion in profits in the past three years but have not paid any corporate
tax because it is a designated pioneer company. Whilst this may not be an
automatic advantage, it is still a strong indicator of where and when to
invest. Incentives that minimize tax, duties and levies, create extra cash flow
which companies can put to better use to maximize shareholder value.
Other factors to consider are
Ownership structure employee welfare and manpower development, technology,
micro and macro-economic activity and political stability.
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