Investors participating in the stock market are often worried about market swings, profit concerns, stable long-term returns, and associated risks. However, investors must apply efficient stock picking techniques while searching for quality stocks with long term perspective. The market participants must apply both fundamental as well as technical judgement before making medium to long term investment decision in the equity market.
Below are some of the aspects that every investor must focus to reap rich returns in the longer term:
1) Management Quality: Market players need to understand that if promoters raise fresh capital, frequently it indicates that they are not competitive enough to generate enough cashflows to sustain or expand their business.
Investors must keep an eye on dividend payout by companies. A closer assessment is needed in situations wherein companies distributes lesser payout to shareowners despite earning strong revenues and when the higher dividend is paid out despite recording lower earnings. Director’s salary should be carefully examined in both absolute terms as well as the proportion of the company’s net earnings. The market players must check any abnormality between their salaries as compared to salaries paid to their counterparts in competitors’ companies.
2) Business Risk: Every business model revolves around customers’ needs and fulfills them in the most efficient ways. However, businesses are often exposed to risks on their incapability to adjust to changed customer expectations. So, the investor must look for those companies who understood the customer’s pulse and change their business model accordingly so that they can extract more growth from the market.
3) Financial Quality: Sometimes the companies declare sky-rocket revenue and profits, but their balance sheet reflects mounting debt. The reason for that is no control over working capital. Company’s receivables are increasing faster than revenues, gross margins of business are under pressure due to increase in the price of raw materials, but still, the company manages the EBITDA margins by cutting down on other related costs such as employee costs. These changes are accepted for a one or two quarter but for long term EBITDA and Gross margins must show similar movements if the company is not able to maintain that then investors must keep a right eye on that company.
4) Valuations: Valuation is an essential factor which any investor shouldn’t miss. The investor must buy good stocks in bad markets by looking into its valuation. Any business which is growing in nature without compromising its financial and operational strength will hold an edge over competitors and investors must keep an eye on those businesses continuously. Value investing is a rare art which every investor must follow to maximize their financial gains.
If investors follow these factors carefully and apply it on a regular basis, then they can pick the stock at a reasonable price for long-term. Market participants need to prudently analyze macro-economic factors, regulatory changes, company’s past and anticipated financial performance and recent significant announcements, in order to achieve long term financial independence in the equity market.
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