Four traits to look out for in companies you’re interested in buying shares in

Simangele Mzizi, 29 Jan. 2013

Tags: shares, buying shares, investing in companies., shareholders, penny shares, penny share companies

On the Johannesburg Securities Exchange, there are over two hundred penny shares that are quoted. To make gains as an investor, you need to filter out the losers to spot the winners. This will help you find penny shares that will soar. But do you know what to look out for to ensure you’re backing a winning horse, or in this case a winning company? Here are four things to look out for…

They say image is everything. This may just apply when looking for companies in which you want to buy penny shares. If you filter correctly you can eliminate half of the two hundred smaller company shares on offer which aren’t appropriate for your portfolio and make sure you’re onto a winner from the start.
Four characteristics to look at before you invest in a penny share company
1. The company’s mission statement - This gives focus to the company’s strategy. You want to invest in a company that’ll enable business to bring together people with a common ideology and direction. You want to invest in a company that’s able to keep to its own focused agenda.
2. The company’s management - Is the company’s management committed financially to growing the business and as a result rewarding its shareholders instead of itself? Pay attention to recent director share purchases or selling as this could indicate if they’re confident or not in their equity holdings. This will help you decide if you should follow suit.
3. The company’s balance sheet - This is a statement of what the company owns and owes. This is used as an indication of the financial strength of the company.
“The most commonly quoted balance sheet ratio is gearing, which is a company’s total debt expressed as a percentage of its net assets. Use the balance sheet as a barometer and feel free to phone the company secretary and quiz him or her on the ratios,” explains Francois Joubert, Chief Investment Strategists for Red Hot Penny Shares.
4. Company growth - You should look if the company is growing and adding value for its shareholders. Cash is always king and you must look at a company’s annual report to see if the company’s generating cash at an operational level. Remember no business can flourish without cash.
“The key test for penny shares and other potential investors is whether the company appears to be growing in a sustainable manner and in a way that creates extra value for its shareholders,” says Francois Joubert.
As investment guru Warren Buffett puts it: “Rule number one of investment is not to lose money. Rule number two is to remember rule number one”. If you follow these characteristics as a guide, you could be on your way to finding winning companies to invest in.

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