January 27, 2009

How to Choose the Right Company for Investment?

The global recession along the sudden collapse of high profile companies has made it quite difficult for the investors, especially individual and retail investors to choose a company where their investments could be safe.
Moreover, the regular fluctuations in stock market and sudden fall of the real estate sector in India have made things more difficult to understand and believe.
Things are not easier for companies either as they are also striving to raise debt, capital from public or from financial institutions.

Here are some general but very effective points which can be helpful in choosing among different investment schemes of different companies:
1. Returns Offered – First of all, when investing in fixed return securities, see the rate of returns claimed by the company. If a company is offering very high rate of returns (say 15%), be careful. It would not be a wise decision on a borrower’s part to raise money at such a high rate. In such cases, the possibilities of a company not being able to meet its obligations increase. Go for securities offering decent returns.
2. Company Rating- Almost all the companies get themselves rated with credit rating agencies like
CRISIL, ICRA etc. The ratings of the company are often mentioned in the deposit applications. Moreover, credit ratings can easily be found on the websites of the agencies providing the credit rating. (An AAA rating by CRISIL means that the security of funds in the company is very strong)
3. Company Profile- The historical profile of a company is also a vital component while analyzing the security of funds in a company. This is the general goodwill and name of the company. The Tata Group is one, for example, that can be easily trusted upon.
4. History of company’s share- If you follow the stock market, the history of a company’s share prices can also be a good indicator. The share prices trends can be used to see the level and the frequency of fluctuations in the share prices of a company. Normally, risk factor is directly related to the level of fluctuations.
5. Liquidity- If you can source a company’s annual report or interim financial statements, look for the quick ratio (also called acid test ratio). Generally, an quick ratio of less than 1 would determine that the company cannot meet its short term obligations without selling its stock/inventory. Moreover, very high ratio would mean the company has excess current assets (more than what is required). A quick ratio of around 1 is considered satisfactory.
6. Dividend policies- It is always good to see the performance of a company in distributing its profits. This can be done by analyzing the past dividend policies of the company. This would reveal, whether the company keeps its profits with itself or distributes it with the shareholders.

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