A good business is a business which you can more or less predict with confidence that over the long term, its going to increase its earnings, its profits every year.
As a result, increase in shareholder value and hence the share price. In
other words, the share price will go up not because of speculation but because the company is worth more.
Look at past historical performance. If you look at a company records for the last 10 years, and if earnings have been increasing steadily and consistently, then its more likely they continue to do that in the future. Its not a guarantee, but it’s more likely to do so.
Rather than a company who has had erratic profits in the past, look for a company which is consistently increasing in earnings.
The next thing is to look out for is the USP or unique selling proposition. It’s the same for private businesses, same for listed companies. Does the company have a strong unique selling proposition that gives it a competitive advantage?
That when even if rivals and competitors come in to cut prices, they can maintain their margins because they’ve got a unique positioning. The unique positioning could be due to a patent they hold. It could come from the brand they have.
Take for example, Nike. If 10 other companies were to start and compete with Nike and they come up with a brand called Niko, instead of Nike. Will Nike lose all their market share? No, they won’t. Why? Because people buy because its Nike. Because it’s a USP.
One question to ask yourself, “Does this company have room for growth? Can it continue to grow? Are there new markets it has not explored yet?”
So lets say it’s a fantastic education program that has been working in the States, could it work in China? And that gives you growth prospects. Does the company have conservative debt financing, alright. Can it pay back all its long term debt in 3 years?
The next thing is the management that’s in place. For the management, do they hold a lot of shares in the business? If they do hold a lot of shares in the business, they are more likely to hold a vested interest in making sure the company works, rather than siphoning off money for their salary which could happen.
Here’s a final tip, a company can make a lot of money in profits, but you may never see the profits, because it is channelled back to sustain current operations to renewing and refurbishing plant and equipment.
So I always advise investing in businesses where, in which you they don’t have to maintain plant and machinery. Take for example, insurance businesses. Another example, Nike, doesn’t even own their factories.