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FAQs on how to evaluate a company’s stock while investing

Srinivasa Sharan
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FAQs on how to evaluate a company’s stock while investing
  • 1. What does an investment in a company’s share represent?  
     An investment in a company’s share represents an ownership in the company, which allows an investor to participate in the growth of that company over the long term. For example, if a high net-worth investor considers investing Rs 100 crore in a company with a market capitalisation of Rs 1,000 crore, the investment represents a 10 per cent ownership stake in the company.  
      
  • 2. What are the factors to be considered while investing in the equity of a company? 
    Some of the factors that are considered important for investing in the equity of a company include the prior track record of the promoters of the company, corporate governance standards of the company, an analysis of the financial performance of a company, an evaluation of the industry in which the company operates, the company’s standing in the industry as well as the prospects of the company & industry.  
      
  • 3. How is the prior track record of the promoters and corporate governance standards evaluated?  
    Investors need to evaluate the prior track record of the promoters by looking at any other entrepreneurial ventures undertaken and how successful they have been in their prior roles. For corporate governance standards, the investor needs to evaluate the financial disclosures of the company and also, check how many independent directors are on the board of directors of the company. 
      
  • 4. How is the financial performance of a company evaluated? 
    The financial performance of a company is evaluated by looking at the historic financial statements of the company. An assessment regarding the growth in revenue, operating income, and profit after tax over the past 3 to 5 years can be done to understand the financial standing of the company. Higher revenue and profitability growth along with stable to growing operating income margins is a positive sign about the financial performance of a company.  
      
  • 5. How should an investor evaluate the company’s standing within the industry and its growth prospects?  
    An investor can evaluate if the company is a market leader within the industry and whether this leadership is driven by any specific product along with the service offerings the company has. For example, in the FMCG sector due to recognised brand leadership by companies such as Hindustan Unilever and Colgate, industry leadership is strong along with high operating margins. Similarly in the commodity sector, cost leadership (i.e. lowest production cost) can drive higher margins for companies in the medium to long term.  
    The growth prospects of a company can be evaluated by considering the source of competitive advantage that a company may have within its industry and by also, evaluating the fact whether this can sustain in the medium to long-term. Apart from this, the growth prospects of a company may be linked to the growth prospects of the industry, as industry analysis may prove useful for investors.  
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