Researching companies

If you’re thinking about investing in a company, dig into it: Learn enough to make a confident, informed decision to buy or not to buy. Here are some questions you might ask. (Don’t worry about unfamiliar terms — just start learning about investing, and you’ll get better over time.)

• Is the company in a growing industry?

• What’s its business model — how, exactly, does it make its money? Does it require a lot of money to operate and grow (as in manufacturing) or not so much (as in online marketplaces)?

• How has it been performing? Are its revenue, earnings and profit margins growing? How does it compare with competitors? Is it growing its market share?

• What sustainable competitive advantages does it have? Examples include a strong brand, valuable patented technology, economies of scale, a big multinational presence and robust employee retention.

• Does management impress you by communicating candidly (as in annual letters to shareholders) and executing smart strategies?

• What risks does the company face? Many things could go wrong, such as losing a customer that accounts for a big chunk of its business. (Companies’ annual 10-K reports typically list a variety of risks.)

• Does the company pay a dividend? If so, what does it currently yield, and how much has it been increased over the past few years? (Stocks without dividends can be great investments, but reliable income from a solid dividend payer is appealing, too.)

• Does the stock seem overvalued or undervalued? (Ideally you’d buy shares that are undervalued.) Valuing a company is a subjective endeavor, but undervalued stocks typically have price-to-earnings (P/E) ratios below their own five-year averages and below those of competitors.

Next week we’ll offer resources that can help you research companies of interest. In the meantime, you might learn more in investing books by Joel Greenblatt, Peter Lynch, Philip Fisher, John Bogle and The Motley Fool.