Do not just concentrate on profitability
For many investors, the key focus is on a company’s profitability. While this is undoubtedly important, in reality more is behind a company’s financial health than just profitability.
For example, the balance sheet strength of a company has a major impact on its long-term earnings. If it has a high level of debt, then the profits can be enormous, but most of it may eventually be used up for interest payments. Similarly, a weak cash flow that pays too generous a dividend or has burdensome investment commitments could jeopardize a company’s long-term viability.
By focusing on a company’s financial performance as a whole rather than profitability, an investor can better assess their overall risk profile. That should increase portfolio returns in the long term.
Find a competitive advantage
For the most part, the companies that stay in the long run have a competitive advantage over their peers. For example, in the extractive industry this could be on a lower cost basis or in high customer loyalty, which has allowed them to enforce higher prices on the market than their competitors.
Both examples mean that the company in question has a better chance of surviving difficult times within the industry. They also mean that the profitability of these companies in the boom years is higher, which can lead to an improved share price performance.
The simple secret to buy the best stocks
As Warren Buffett once said, you do not have to have a genius IQ to be a great investor. All you need is simple math, knowing what numbers to look at, and some common sense.
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