When looking to invest in a business, whether in its shares on in its debt instruments, it is extremely important to do a thorough analysis of the company’s fundamentals to ensure that it runs on a solid foundation and has a bright future ahead. Only then can the safety of your investment be guaranteed together with the prospect of profits. And below, we take a brief look at four fundamental things to check for when considering a company for investment.
The Business Model
The success of any venture is largely dependent on its business model. An ideal business model will guarantee that the company generates profits by incurring the least cost. The model has to work in all market conditions, whether it be during an economic boom, a market contraction, or even depression. Investment firms like Arthur Penn Pennant Park often do a thorough research into the history of the company to see whether the business model has been successful in generating profits during the various market conditions in the past years or not.
The next important thing to look at is the leadership of the business. Is the leader a very capable person who can motivate all employees and has earned their respect? Are they intuitive and knowledgeable enough to grab on to a market opportunity when they see one? A good leader can easily double the profits of a company. Check their history to see how many businesses they have started or managed. If all the ventures they managed ended up shutting down without making any profits, then that is definitely a red flag.
Another important fundamental to look into is the market position of the company. Check the number of competitors in the market and see where the company is positioned in terms of market share. Pennant Park recommends avoiding companies that are at the bottom in terms of market share even though they have been in the business for several years. Instead, focus on companies that have quickly increased their market share within a short period of time. And this brings us to the last fundamental factor you should check in a company – its prospects for growth and expansion.
You need to analyze this in two ways, Firstly, look at how well a company can increase its market share, together with the cost and time required for such a growth. If it is projected that the business can capture a larger part of the market quickly using minimal capital, then that is definitely a business that you should consider investing in. The second analysis should focus on how well the business can expand into new markets. For example, a company might be selling perfumes. Can they diversify into soap, shampoo, and other beauty products? This is also an important point that needs to be considered since the ability to diversify into new markets will position the company for greater growth in the future, thereby guaranteeing better returns for your investment.