subject: Finance figured-how to choose a company,its value,and invest [print this page] Finance figured-how to choose a company,its value,and invest
Longterm investment in shares- the sure way to make money-returns better than Banks.
This is for those who want to invest their hard earned money in shares on a long term basis. There are lot of facts to be considered to predict the market. Any shrewd investor should do his homework on the industry in which he is going to buy shares from the market. The industry will have its ups and downs. This has to be taken into account. Some external factors and events will also effect the performance of the industry as a whole.So, prudent as you are, choose a few indusries in which you have some basic knowledge and study them for atleast 6 months, when you have a considered opinion about that industry,make a list of the companies in that industry and select some to make investment.
PARAMETERS TO SELECT A COMPANY
1) Equity capital should be in accordance to its scale of operation.
2) Debt capital should be optimum, should not be in excess to its scale of operation and technology. Excess debt not advisable.
3) Return on Capital(equity capital+debt capital) should be consistent on for a long period, should equal the industry average. Below that avoid. Above average consider. This ratio is available in periodicals in the market. Zero in for a 15-20% return.
After making a list of companies, now the question is which to choose?. Go for a compnay which has good return on capital and at the same time available at a low price. If the price is high wait. Naturally the price will be high when the market is on a bull run.
HOW TO VALUE, WHETHER THE SHARE PRICE IS AT 'BUY' FOR LONGTERM?.
To arrive at the value you should know:
1) Enterprise Value
2) Return on Capital (averagr return)
3) Calculate total capital at the time of buying shares.
Enterprise value is the value that market is prepared to pay for that company.
Enterprise Value = Market Capitalisation + debt Capital
Total Capital =Equity Capital + Debit Capital
Equity Capital is the money contributed by promoters and other share holders plus the portion of retained profits(after disbursing dividents)
So when you decide to buy make sure that
Enterprise Value = Total capital at the time of buying X[1+ average return on capital%]^5 or 6.
If the left side is < or = to right side than 'BUY'
So the golden rule is invest in HIGH 'return on capital' companies at a LOW price, which produces HIGH 'return on investment' over a period of time.
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