3 Ways To Spot A Great Company

Great businesses have the potential to turn into “multi-baggers” for investors. Yet, too often, by the time investors know about such companies, they are already market beaters. So, how do we spot great companies before they become “great”? Here are three questions which you can ask.

Does The Company Have Pricing Power?

Great companies often have good branding and customers are often willing to pay a premium for their products or services. An excellent way to spot great companies is by looking at the margins of the businesses.

If a company has a higher gross margin than its competitors, it might be a sign that this company has better pricing power than its peers. Moreover, if we can see an expanding profit margin year after year, it can signal to us that the company is growing its pricing power in the industry, which is a sign of strength.

Does The Company Have A Bright Prospect Ahead?

Secondly, we have to look at the industry that the company is operating in. A company operating in a growing industry will have a far better chance of growing into a multi-bagger. After all, a rising tide would lift all boats. By comparing the revenue and profit trend of the company with the overall growth in the industry, we might be able to see if the company has been able to grow mainly due to its ability to gain market share or if it is enjoying the growth of an industry. Preferably, we want to find a company that can grow with the industry and by gaining market share.

Does The Company Have A Great Management Team?

Lastly, a great company is often the result of great management. We want to find a management team that is able to manage the business for the long term. They should be able to focus on paving a sustainable growth path for the company instead of just looking for quick fixes, like cutting costs or taking on more debt, to grow the company.

Foolish Summary

There are no fixed rules on what makes a great company. However, we can improve our chances of spotting one by focusing on some of the common characteristics of a great business as seen above.

If you want to learn more about investing and to keep up to date on the latest financial and stock market news, you can sign up for a FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore

Also, like us on Facebook to follow our latest hot articles. The Motley Fool's purpose is to help the world invest, better.

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.