Question

In your opinion, what would make a company a good financial investment? What would you look for?

In order to answer this question don't just limit yourself to the three ratios for the paper but what are key indicators of a strong company?

Answer 1

There are several factors that make a company a good financial investment. Some of the indicators are:

1) Industry outlook - There are some industries that are in the booming space. A majority of the company in such an industry exhibit good growth and thus shareholder's earned a good return. Cyclicity is a factor to consider as some of the industries have phases of bust and boom. However, this is not a sole indicator as bad performing companies can be found in industries that are doing well as well as good investment-worthy companies can be found in industries that are not doing so well.

2) Company management and vision - This is the most important qualitative aspect while considering a company for financial investment. A company management's vision and the quality of people leading the company have a profound impact on the company's growth and sustainability.

3) Free cash-flows yield- Free cash flow yield is an important quantitative indicator of a company's standing. The free cash-flow yield can be calculated by dividing a company's free cash flows with the current market price per share. This also indicates whether the company is over-value or under-valued.

4) Price to book value ratio - Book value signifies the net assets of a company. A low book value indicates that a company is under-valued relative to its book value. However, this ratio should be examined with a pinch of salt and reseach must be done further to find why investors are willing to pay less for high book value stock currently.

5) A strong balance sheet and healthy debt-to-equity ratio - This ratio signifies how levered the company. Generally, hgher the leverage, riskier is the company beyond an optimal point. If the company has abnormally high debt-to-equity ratio, the company might be undergoing serious operational issues.