- May 3, 2023
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AUTHOR: Jade Bethel, Records Management Assistant
Trust is an important part of our lives. This is especially true in the case of financial exchanges. As an investor, you want to be aware of the types of companies that you are putting your money into and essentially taking part ownership in. Are they going to be a reliable investment in a few years or even months? How is their growth or lack thereof going to affect you in the future? Here are some signs of a trustworthy company to invest in and what you should be looking out for:
1. Competitive advantage
2. Market Leadership
3. Stable Earnings
4. Return on Equity (ROE)
First and foremost, no matter the company that you choose to invest in, their competitiveness in the market is something to consider. How a company brands itself to the public, the quality of their products, even their customer service, are all factors in how that company will grow. If they are underperforming in these areas, there is a good chance that it will not be a beneficial investment to you.
What does a market leader look like?
This brings us to the marketability of a company. What does a market leader look like? These are brands that appeal to the vast majority of the population with new, unique and innovative products. One of the best examples of this today is Apple. Over the years Apple has certainly earned its role as one of the top market leaders with substantial market share in the industry. This is because of who they are and the quality of products they are known for producing. This has created customer loyalty thus putting them in a great position to constantly increase their earnings.
Speaking of that, one must also look at the growth earnings of a company to determine whether the company is able to create an increase in earnings for itself. These earnings are usually set in percentages and are recorded periodically. Ideally, in order to determine if a company’s earnings have grown or not, the current earnings percentage for that period must exceed the previous one. When there is a consistent pattern of earnings growth, this is a pretty good sign that it may just be worth investing in. We should also look at whether the company’s long-term growth percentage is above or below the market average.
While earnings growth is a good indicator of the success of a company, it is important that we keep in mind the stability of that growth as well. From the outside looking in, a brand new company could have a burst of new earnings and revenue growth. The question investors have to ask is if this is sustainable or how long it’s going to last? There are many factors as to why a company’s earnings can suddenly soar or fall. Hence why watching for patterns in these cases is crucial because, like the saying goes, consistency is key.
Lastly, let’s talk about Return on Equity (ROE). This simply measures the ability of a company to turn a profit on the money that its shareholders have entrusted it with. Good news is, if you ever want to know what a company’s return on equity is you don’t have to guess, its actually an easy calculation:
Depending on how high or low, this can be a determining factor in whether you may want to make an investment. Knowing a company’s ROE is important because it tells us if management is making good investments of their own to see growth or if shareholders’ equity is being mismanaged.
With these 4 indicators you have a solid starting point to analyze a company you are considering investing in. Although they are by no means exhaustive or foolproof, these should be used to help make a sound decision. It is always recommended that you still speak with a professional investment advisor before making any investment decisions as they can help you interpret your findings and will likely be privy to market information that you are not. They can also look at your financial position and goals in a holistic manner to help you make the best decisions to achieve them.
Ready to find out what companies you can start investing in? For investment advice, access to our mutual funds plus opportunities in buying local equities*, email invest@rfgroup.com or schedule a call here:
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* Investments in local companies are only available for our Bahamas and Barbados clients at this time.