Thinking from the business perspective

Photo by ~yienshawn92~
Photo by ~yienshawn92~

Collin Yeo said…

uptrending share price tells you nothing on the business and industry outlook”So what does? Consistent CAGR, strong cashflow, earnings and dividends? What if these doesn’t translate into uptrending share price? Would you still buy into the company?

Collin, the 4 points you mentioned above form only part of the metrics that an investor should take note of. The list is not exhaustive but it includes ROE, ROIC, WACC, trade receivables level and so on. These ratios and figures can be obtained easily from the annual reports. But wait, getting your hands on them is only half the work done. The other half of the effort should be focused on the business prospects and the management staff. Most investors neglect this portion as such things are not easily quantifiable and it can be very time consuming to dig for info.

What should investors look out for in terms of business prospects and outlook?
Basically reading up on the work of Michael E. Porter will give you a much better idea.
For example, lets take a look at the group of companies under electronic contract manufacturers.

There are quite a few of such companies listed in SGX. The laptops, computers and other electronic equipment companies are usually the customers of the electronic contract manufacturers. They exist to provide a value added service (example: assembly of components, modules and circuit boards) to their customers. Through these processes, they earn a small margin (5-10%) in return. Compare this to their customers’ margin. After taking back the assembled parts, the customers will then put their own brand name (example: HP, Acer) on the product. For niche electronic products, the selling price can be a few times higher than the cost price. For low end products, the margin is around 20-30%. Read more…

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