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3 Questions You Need To Ask When Looking At a Company

Value investors often pride ourselves (I’m part of that group too!) as people who invest like  businessmen; when investing in the share market, we always start by looking at the fundamentals of a share’s business rather than study the share’s price chart.

But, what exactly are we looking out for in a business? Here are three questions you can ask yourself when trying to study one.

Simple is good

Famous investors like Warren Buffett have said this many times – one of the most important questions to ask about a company is this: “Is the business simple and easily understood?” If we invest in something which we do not understand, then there is not much difference between gambling and our supposed ‘investment’.

Most of the Straits Times Index’s constituents are large companies with simple businesses. For instance, Singapore Airlines (SGX: C6L) is basically in the business of transporting a customer or good from point A to point B safely by air. Elsewhere, the technical processes involved with how Golden Agri-Resource (SGX: E5H) grows its oil palm fruits and processes the resultant palm oil is complex. But in essence, its revenue is earned from selling basic products (like palm oil and consumer products derived from palm oil) to its customers.

Understanding the business underneath a share should always be the first step toward successful investing.

Dependable profit is great

Equally important is finding a company with a successful track record of churning out profits. New startups that come with volatile earnings can be very exciting to invest in. But, a business with stable and growing profitability is the hallmark of a great company.

Telecommunications giant SingTel (SGX: Z74) is one such company with a consistent stream of profits and free cash flow.

Solid potential for growth deserves a thumbs-up too

Lastly, growth is a significant component in the economic value of a company. Without growth, a company will just stagnate and be unable to produce much value for investors.

A company will need to possess a strong economic moat to ensure that it has good growth potential in the foreseeable future. Some examples of strong economic moat are: 1) There is no readily available similar alternative for the company’s products or services; and 2) the company’s products and services are considered necessities for its customers.

Jardine Cycle & Carriage (SGX: C07) is an example of a company that has the first type of moat. The company’s subsidiary Astra International (the main revenue and profit driver for Jardine Cycle & Carriage) is the sole distributor for many brands of vehicles in Indonesia and has an unmatchable distribution channel across the country.

Foolish Bottom Line

The list above is by no means exhaustive when we’re investigating a company for a potential investing opportunity. At the same time, those three questions can at least help prevent you from becoming too disappointed with your investments.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.