How many of us would analyse a company thoroughly before buying its shares? In fact, there are some investors may only the name of the company they have invested in and nothing more. To be a serious investor, it is crucial for you to know as much as you can about the company that you intend to invest in.

What to look out for?

The followings are some of the questions need to be answered before you invest in a particular company:

• What does the company do?
  Hint: What business is the company in? For example, the company may be involved in plantation, construction or consumer products. Do you understand the business, and is it viable and sustainable? The more you understand about the business of the company, the better you will be able to monitor your investment.

• Where are the profits coming from?
  Hint: Most companies make profits from its businesses. But there are companies that will make profit because of other reasons. For example, a company may declare a profit because it has disposed of its assets. In these circumstances, the profit may not be sustainable if it is not generated from its core business. Read through the company’s accounting statements to determine its source of profitability and at the same time, always check the debt level of the company.

• What does the company plan to do in the future?
  Hint: Review the company’s business plan and check whether it plans to diversify its business to enhance shareholder value. For example, a plantation company plans to increase its profit by acquiring more plantation lands. If the company decides to undertake any corporate move, you will need to assess whether it enhances the profit and improves the competitiveness of the company.

• Does the company deliver on its promises?
  Hint: A public-listed company will need to state its business plan and projected growth, including its profit forecast. You have to determine whether the company is delivering on these forecasts as promised. If the company is not delivering, you can ascertain the reasons for its underperformance by checking its prospectuses and annual reports.

• Are the right people managing the company?
  Hint: A company that is run by managers with the right credentials, and good track record and experience can deliver positive results.

• What is the kind of risks the company will be facing?
  Hint: There is no business without risks, and risks will come in many forms. An airline company faces the risks of increasing aviation fuel prices. A glut in the property market poses serious risks to the business of a construction company. Thus, it is important to know the risks which a company faces, as well as its plans to manage them.

• Is the company share over or undervalued?
  Hint: An overvalued share is when you pay more than the actual value of the share and an undervalued is exactly the opposite. As a rule of thumb, smart investors will buy shares that are undervalued that have the potential to give a good and sustainable return.

• How actively have the shares of the company been trading? Are there frequent and unusual price movements?
  Hint: Have such movements been explained by the company? An actively traded share may not necessarily indicate that the fundamentals of the company are good. Investors may be tempted to speculate on the company’s shares based on sudden price upward movements. However, buying shares purely on the belief that their prices will increase is undoubtedly a very risky action.

The abovementioned questions are not exhaustive. Investors who are willing to ask a lot of questions will more likely be able to make smart investment decisions.