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Primary step to invest in stock market is identifying excellent businesses to invest. There are lots of homework required to get some of the companies in our final list. One who looks for excellent businesses to invest must know how to identify them and what the measures to do the same are. This article tells you some of the best points and techniques to identify excellent businesses to invest in right time (would write later about how to understand the best time to buy).
So what an excellent business really mean? In a simple sentence, these are businesses which have solid fundamentals and underlying economics. Future earnings from such companies can be predicted easily. For example, companies that have products or services that creates consumer monopolies. When look for companies that have monopolies, remember to not add companies that have personal competitive advantages than services or products. Such companies may fall to deep troubles if the personal, to whom the advantage associated too, quit the company.
Management of excellent businesses is always rational by working for shareholders than self prosperity. Companies that have good management stick to their promises often considers as best to consider for investment. Whenever looks for a company to invest, identify the management is rational and investor friendly.
I seldom invest on any company that listed to the Business Weeks pages for paying high packages to the CEO. If you see such list of companies paying high packages to the CEO, this will be a best example for personal competitive advantage than product or services. Whenever such high paying executives quits, it will affect the business in a huge way thus investors wealth too. Stay away from companies that have competitive advantages on personnel than services or products. Never compromise to extravaganza of a company using investors money or extravaganza of a CEO..Whenever moves to the financial stability of a company, an investor should be able to predict the possible earnings of a company for at least few years. This would happen only if the investor able to understand the business what the company doing. Business such as real estate, IT, telecom, construction are excerpt from this category because an average investor never able to predict the future earnings of such business. Think this way, a business that have products in the market from last 10 years and able to do the same business for next 10 years without adding much efforts and money to survive, could be a good business to invest. Such companies should be able to survive any situations because of the monopolistic positions of their products and no competitors exist. Excellent businesses always show consistent growth in sales, profits and per share earnings. It also would be in a comfortable position with its Return of Equity (RoE), Return of Capital Employed (RoCE), debt equity ratio.Stay away from companies that have huge debts. Such companies found operating in the commodity sector where have huge competitor base and no competitive advantages to their products or services. Investing on such company stock is highly dangerous to investors. Never invest on any companies, whether it is a consumer monopoly or commodity type, that have any lose making sister firms, organized labor industries, legal issues on it and finally continuous labor problems. Such problems can easily erase investor’s wealth in no time.To find an excellent business, one shouldn’t require extra ordinary brain. Just needs to look around where you are now. You will be able to find at least one or two products that have consumer monopoly in your nation along with extra-ordinary management and financial stability in place. It is similar to how Warren Buffet found American Express was his potential investment. While sitting in a local restaurant, he found people often uses Amex cards to pay their bills and an intelligent investor like Buffett never waits to add Amex to his circle of competency as a potential investment. He later invested on Amex and made his wealth to next height.Just a final word, above are just the important areas to look whenever someone tries to find a best business to invest. It doesn’t mean all the must check and research areas covered, but covered only points that understandable to any one from any range. There is lots of homework to do before investing on any business as we are playing with our own money.Inform me what you think about this article and if want to hear anything from me…