The first step in investing is finding a good company. As an investor, you cannot afford to own companies that have a Chevrolet attitude – good enough to get you from here to there. Instead, you must only invest in companies that are like Porsche, Lamborghini, and Bentley – absolutely and without doubt the best in their class.
To continue that car analogy, let's pretend you would like to buy a used car. Most people would only buy a used car after they have investigated the Vehicle Identification Number. Typical car buyers make sure that it has never been in an accident, that it does not have significant signs of rust, and that the engine seems to be in working order. You might also get a professional to look at the car. While there are no guarantees that your newly-purchased used car will not have a problem, you take precautions against the unknown with substantial research. The same is true when you buy a company.
The major indicators of a "Bentley" company are relatively easy to understand. Unfortunately, the one indicator that everyone seems to talk about is almost meaningless. A company with a low price does not make it an excellent investment. A car may seem cheap, but if it breaks down two weeks after purchase, then it is a lousy deal no matter what price you paid. You want to pay a fair price and be reasonably confident the company will thrive.
The most critical metric of any company is that it is currently profitable. Never buy a company that is not running its operation at a profit. If a company lost money for the past 12 months (often referred to as "trailing twelve months" or TTM), then you should not buy the company. Do not bother with any analysis for a company that does not make money! Just go to another investment possibility.
The major indicators of a healthy company are:
- The growth of the company's sales.
- The growth of the company's earnings per share of stock outstanding.
- The growth of the company's market value compared to its earnings.
- The growth of the company's earnings before taking into account interest and taxes.
- The value of the company compared to its earnings as compared to other similar companies.
- The productivity of the company employees relative to industry averages.
You can download a worksheet for this on the web by going to http://www.Confident-Investor.com/analysis-worksheet. You will need to be a registered book owner to access this page but you can register easily and for free by following the instructions on the site.
Common accounting practice and the rule of law in the US requires that public companies publish the core data behind these metrics. In some cases, you can find this information on the company's investor portion of their website. My book, The Confident Investor, will reference sites that have compiled and display this public information.
As you calculate each of the values, write them down on a piece of paper (or use the worksheet at http://www.Confident-Investor.com/analysis-worksheet). You will apply a standard against each value and a resulting score. By combining all of the scores, you can decide if you can confidently invest in this company.
This is exactly the process that I go through for my daily posts on different companies that I review on this site. These 6 metrics plus profitability are all you need to separate “Chevrolet” companies from “Bentley” companies.