Investment Review day 46 of 50: What do I look for in an investment pt2?

Investment Review day 46 of 50: What do I look for in an investment pt2?

Understanding a company’s financials is fundamental to diligent investing. However, it’s crucial to interpret the numbers within the context of the company’s growth stage. You wouldn’t expect a young, rapidly expanding company to have the same valuation multiple as a mature industry giant. Similarly, the metrics that best highlight financial health can differ throughout a company’s lifecycle.

Here are a few of the financial indicators I examine when assessing an investment opportunity:

Revenue Growth: Seek consistent, sustainable growth appropriate for the company’s size and industry.

Gross Profit Margin: Assesses production efficiency. An increasing margin demonstrates pricing power.

Operating Profit Margin: Similar to gross margin, but factors in all operating expenses, revealing overall cost control.

Free Cash Flow Margin: Demonstrates real cash flow after expenses and investments. Vital for companies at all stages, and especially critical in uncertain economic conditions!

Cash & Equivalents vs. Debt: Ideally, cash outweighs debt, providing liquidity and flexibility.

Positive Operating Cash Flow (OCF): Consistent positive OCF showcases a financially sound core business.

Capital Expenditures (CapEx) Less Than OCF: CapEx represents investments in property, equipment, etc. Ideally, OCF covers CapEx, leaving available cash for other uses.

Decreasing Shares Outstanding: Share buybacks can boost earnings per share, indicating confidence in the company’s prospects.

Low Stock-Based Compensation: Minimal reliance on stock-based compensation demonstrates focus on sustainable profits.

Earnings Per Share (EPS) Growth: Indicates a company’s ability to generate increasing profits for shareholders.

It’s important to always consider these metrics alongside a company’s specific industry, competitors, and stage of development. Great metrics for one company could be a warning sign for another!


I’m putting my holdings under the microscope. Over the next 50 days I’ll break down my whole investment portfolio. Wins, losses, and the ‘why’ behind it all. And on day 50 I’m going to share my full portfolio so you can see how my strategies played out in the real world over the last twenty years and what we can all learn together. Follow along for the journey! #StockAnalysis #50daychallenge

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