When you are dealing with fast growing companies, pay special attention to how the business has been growing recently and what plans the management has in place to grow the business in the future.
What is the Company’s Growth Recently? What Plans does Management Have to Grow the Business?
As an investor, you need to look for companies that are growing slowly and steadily. If companies use the company cash flow to fund their expansion, then that is great. If company uses moderate debt, that is also acceptable. When a business expands slowly, it can execute its plan methodically. Slow and steady companies generate great shareholder returns over the long term.
Does the Company have Related Party Transactions with the Family Members of the Senior Management or Board of Directors?
You need to research at least three or four years of annual reports to research any related party transactions. If the company is doing business with any of the company’s senior management or relatives who are involved in other companies, you need to avoid this company. When relative companies act as suppliers, they are likely paid top dollar for their products or services. That will affect the profit margin of the company, and in turn, decrease the share price of the stock. If the number of pages allocated to related party transactions increase every year, be cautious and need to dig deeper.
Another point to examine is whether the company is lending any money to senior management or directors. If the answer is yes, you need to sell that stock so that you can avoid losing money.
Are you able to understand the footnotes of the Company’s Financial Statements?
When you are reading the financial statements of prospective companies, be sure to read the footnotes. If you are reasonably good at reading financial statements, you should be able to understand the footnotes. If you are not able to understand them because they do not want you to, move on to another company.
Is the Management Candid in its Performance Reporting?
If management only trumpets successes or tries to hide poor results, that will give you an idea about their openness. You need to find a company where the shareholders are treated like owners. If management treat shareholders as owners, they will talk about positives and negatives openly.
Does Management Deliver What it Promises?
When you are researching companies, you need to find out if management has delivered what they have promised in previous years such as:
- Future earnings outlook
- Company profitability plan
- Setting target growth rate of the companies
- What they want to achieve in five years