Looking for a great company to invest in, look for these three indicators

Fsp Invest, 20 Sep. 2013

Tags: indicators, company, indicators of great businesses, fat profit margins, low capital expenditure, competitive advantage

Warren Buffett and other investment greats have made their fortunes from investing in great companies. But how can you uncover these great companies so that you can share in their success? If you’re looking for a great investment opportunity, look for these three indicators…

Great businesses share some common traits, Dan Ferris in Daily Wealth explains…

You can look for a company that has a competitive advantage over others. Another important trait you need to look for is thick profit margins.

Bumper profit margins are a solid indicator of a great business

A thick profit margin generally indicates a business is efficient at allocating capital and controlling costs. This means the company can retain more of its revenue as profit.

It also means the business has a built-in buffer of safety. This means the risk that a drop in revenue will cause an operating loss is much lower.

Obviously, this means some industries are much more likely to produce great businesses than others... But if a company can maintain a relatively thick, stable profit margin compared to other businesses in the same industry, it's another big sign you're on to a great business.

Thick profit margins are universally desirable. Everybody in business would much rather net R0.20 in profit for every rand of sales than R0.02. When you're able to hold off competition AND make a thick profit, that's as good a financial result as a business can ever get.

Low capital expenditure is another sign of a great business

Another characteristic of a great business is low capital expenditures. This basically equates to being able to employ a relatively small amount of capital and get incrementally more growth out of it.

A great example here is Microsoft. Microsoft didn't need to build a factory to produce its new Windows operating system. It didn't need to build a mine or buy a million trucks or a million planes or anything of the sort. It required just a small capital investment, next to none really. It might have needed to hire a few more people. And so it can make a huge return on it. That's a great characteristic.
Warren Buffett often gives the examples of Coca-Cola and See's Candies, because they've required little capital to grow... And they earn so much more now than when he first invested in them.

So there you have it, if you’re looking for a great investment opportunity, look for these three indicators.

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