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Tricks To Pick Best Companies To Invest - For Retail Investors

Investment is one of the tool which every human being do in order to gain maximum return on investment. In India 65% populations are young and with growing economy, per capita income is also increasing. Young generation always tends to take risky bets & equity market in one of the major destination point. Most of the investor take mutual fund investment route to ensure assured return with low risk whereas some of them decide to take the plunge by their own. Investor taking the plunge and most of the time burn their finger before exiting the equity market.

It is very important to know few basic pointer which can act as instrumental in identifying good equity for short, medium and long term. The in-lined are some of the pointers every investors should remember:
  • Identify Sector - It is advisable to choose sectors such as IT, Manufacturing, Oil & Power etc. Selection of sector is based on the economic state on domestic and global level. In case economy is growing then Metal, Cement, Capital Goods, Oil & Power, Mining, Financials, Ports & Shipping IT are preferable. Real Estate is one of the sector which is dependent on geography specific policies. On the other hand, in case of recession it is advisable to select defensive sector. Public Sector Units are mostly the preferred one as they may approach government during tough time for equity infusion.
  •  Identification of Company - It depend on multiple factors and those are as follows
  1. Product or Services - Check how identified company, product company or services are unique. How fast competitor would be able to enter into that segment.
  2. Competitor - It is important to know company competitor and their strengths. How competitor may impact identified company growth. It is advisable to go for the leader position company.
  3. Investment on research - Research investment is very important for companies offering product or services. If investor identified companies which falls in mining sector then it is not applicable.
  4. Government Policy - Check ongoing policy of government in identified company sector and probability of any change in regulation. It is advisable to follow company news for two months before doing predictive analysis.
  5. Management Team - Listen to management interview and try to analyze management view about ongoing business and its trend. The positive tone indicate that company will meet or beat its revenue and profit expectation.
  6. Revenue Growth % - Check company revenue growth Q-o-Q & Y-o-Y; Higher the % indicate good  implementation of Strategy by the company.
  7. Revenue Forecast - Check Company Revenue Forecast, double digit growth forecast is considered as good state of company.
  8. Read Quarterly Result Press Release - Press release of quarterly result is nothing but an abstract of company business. Investor should check revenue growth percentage, revenue forecast, EBITA margin, Profit margin, Growth in EBITA margin. Any negative growth indicate that company is facing competition or slowdown or failure in execution of strategy.
  9. Earning Per Share (EPS) -Earning per share is calculated by dividing total profit divided by total number of floating shares. Higher the EPS indicate robust profitability. In case EPS is lower than do check above parameters. In some case seasonally slower quarter or disruption in economy such as Demonetization Drive which Indian government is undertaking currently make impact even the best company in adverse way.
  10. Price per Earning (P/E) : Price per Earning is calculated by Dividing ongoing share price of company in the stock exchange divided by EPS. The lower P/E indicate that the company share is not expensive Please check identified sector benchmark P/E expectation and company P/E. If company P/E is lower than sector P/E than share price is not expensive whereas if its reverse than its expensive.
  11. Free Cash Flow : Check free cash flow generated by the company. Higher free cash flow give company more flexibility and may use free cash flow to buy back company share from the stock market.
  12. Cash and Investment - Don't miss to check most important deciding factor for selecting company for buying. Higher the cash and investment is always good and it gives company broader flexibility to invest in enhancing capabilities.
  13. Debt Level - Check both quarterly and annual report and ensure that you know the company debt level. Lower the debt level, Higher cash and Investment, Free cash flow, low interest outflow against company debt. It indicate company capability to service their debt.
  14. Company Rating - Must check what most of the analyst are thinking about the company. 
  15. Credit Rating - Check Company Credit Rating which Credit Rating Agencies assign. Good rating always attract investors to buy company debt at lower interest rate and cost of raising funds are always low.
  16. Other Income - Investment earning, Interest earning, Monetization of real estate, Selling of other company share which company owns are considered as other income. Most of the company sitting on huge cash pile generate handsome other income. It is always positive for EPS and P/E.
  17. Market Capitalization - Investor should check Market capitalization. It is calculated by multiplying Share price of company and total floating share. It changes with the change of share price.
  18. Selling and Administration Cost Management - One should check quarterly S&A. The lower S&A and higher revenue, EPS indicate that company is executing its business plan effectively and efficiently. On a contrary if its increasing whereas Revenue & EPS is declining indicate warning bell.
The above are the process which may help any investor to decide their own about their hard earned money investment instead of relying on Mutual fund which uses your money but returns are low.
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Disclaimer - Please contact your financial adviser before investing.
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About Devendra Prasad

20 years plus industry veteran of domestic and international ICT domain with the expertise in Business, Technology, Strategy and Analysis. Specializes in forecasting impact analysis, trends and recommendations for Investments, Technology and Regulations.
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