Financial Analysis
Essay title: Financial Analysis
In analyzing potential companies for which to invest one must first choose a certain set of guidelines or criteria that he or she will use. These criteria should be used to compare one company to the next, regardless of what industry each company is in. Companies in different industries must be able to be analyzed and compared to each other in order for an investor to be able to make the proper decision of which company will best serve his or her investment goals. Therefore, these criteria must be universal in their use. All companies should be able to be analyzed using them. Clear and comprehensible results should be seen in the end, leaving only one clear choice.
In order to come to such a conclusion I have chosen certain criteria from numerous sources. These criteria are the ones that set the best standard and make it possible to compare all companies, regardless of their industry or differences.
Warren Buffet is an excellent example of one who has mastered the art of value investing. He is able to pick stocks better than anyone else. With this great ability he has a set of criteria that he looks for in a company. One of these criteria is, has the company consistently preformed well. This is a very broad topic. Depending on what one uses to research this, one could come up with numerous results. Therefore, in analyzing this, one can look at numerous facts, numbers and ratios. The criteria used will be has the dividend been raised five times in the last twelve years, there should be at least 25 years of uninterrupted dividends, and the earnings have improved in at least seven of the last twelve years.
The first criterion is the dividend has been raised five times in the last twelve years. To clearly understand this criterion one must first clearly understand what a dividend is. A dividend is the distribution of a portion of a companys earnings, decided by the board of directors, to a class of its shareholders. The amount of a dividend is quoted in the amount each share receives or in other words dividends per share. Dividends may be in the form of cash, stock, or property. Most secure and stable companies offer dividends to their stockholders. In regards to this criterion a dividend refers to a cash dividend. Dividends are a way in which a company can show that it is finically stable and has strong future prospects and performance (quote investopedia.com).
The next criterion is there have been at least 25 years of uninterrupted dividends. This shows the companies stability through good and bad times. The worst thing a company can do is cut their dividends. It is normally a sign of possible trouble in the future. So a company that has a long history of paying its dividends shows a stable company in the past and insights into its future performance. By having 25 years of uninterrupted dividends it shows that the company has the potential and ability to
The earnings have improved in at least seven of the last 12 years. Sometimes referred to as the net income or net profit, the earning show how profitable a company has been. There are many ways an investor can analyze a company in regards to earnings. Some prefer to just look at the earnings of the company while other techniques involve comparing earnings to other statistics, such as earnings pre share or earnings compared to the price of the stock. We shale discuss the differences later on. This is important because it shows a company has continued growth for the majority of the past 12 years.
Other criteria that can be used to compare companies are, and those are used by Buffet is, are the profit margins high? If so, have they increased and are they increasing? This is important because high profit margins are a sign of that the company is practicing good business. If a company has increasing profit margins it is not only a sign that the company is doing good business but that the management and executives have efficiently kept expenses down and have been successful in controlling them.
The next criterion is extremely important in the analysis of a company. It comes from Fisher’s 15 points. Does the company have product or services with sufficient market potential to make possible a sizeable increase in sale for at least several years? For an investor this criterion should be a one of the first things they look at. If a company is making a product that is not going to be useful or needed in the future there is really no real reason to invest in this company. Also, the industry needs to be examined because if the industry is going to be struggling as a whole in the foreseeable future then there should be hesitation to buy the company’s stock. This is because there would be no potential for the company to make any future profits in the long run; therefore there is not any real reason to invest. This is why this criterion is so vital to an investor.
Another Warren Buffet