Before you invest any of your hard-earned dollars into an exciting company you just discovered, you need to do some homework. Below are the kinds of questions you should ask about any potential investment. Do not be intimidated or discouraged by this list. You need not master everything at once. Beginning investors should just keep learning slowly. We can help you at
» READ MORE: www.Fool.com
, and you can learn a lot from books by experts such as Peter Lynch.
What business is the company in? What's its business model (that is, how exactly does it make its money)? Is it in a profitable, growing industry?
What's the company's track record? Has it regularly rewarded shareholders? Have revenue, earnings and profit margins been increasing in past years? How do these numbers compare with those of competitors?
What can you learn from its financial statements? Has its debt level been rising or falling? Are accounts receivable and inventories rising no faster than revenue? Are profit margins healthy and, ideally, growing? How about return on equity (ROE), return on assets (ROA) and other measures? Are there any red flags to investigate further? Is anything in the statements unusually cryptic? (It's often best to steer clear of companies you don't understand very well.)
What's the company's competitive position and strategic vision? Does it have a strong brand? Is it a leader in its field? Is it gaining market share? Do you have confidence in management - and its ability and dedication to keep the company growing, to be straight with shareholders, and to look out for their interests?
What are the risks that the company and its investors face?
Is the stock valued attractively? This is a difficult question to answer for any stock, and there's usually no one right answer, either. You might begin by looking at the company's current P/E ratio, comparing it with the firm's historical numbers.
Next week we will offer some resources to help you answer these questions.