Daily Gains Letter

Three Non-Financial Measures That Reveal a Company’s Prospects

By for Daily Gains Letter | Apr 22, 2013

















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William Feather said it best: “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” (Source: BrainyQuote, last accessed April 18, 2013.) A buyer in the stock market usually believes that what they are buying will soar higher, while the sellers think there isn’t any more room to the upside and the stock is bound to go down.

Reasons to buy or sell can be many, but at the end of the day, what really matters is if you, as an investor, earned any return on your investment or not—losses eat savings and can cause significant delays in achieving your long-term goals.

To be on the “right side” or to be able to earn return on the capital you have invested, you need to increase your odds of profitability. You can do this in many ways. First, you can spend rigorous amounts of time researching the company and figuring out its financial standing. Similarly, you can also look at the following non-financial performance measures to assess the business you are wishing to invest in.

Management

This is very simple: to run a business efficiently—and be profitable—every business needs a good management team or leaders who can make decisions not only regarding daily operations, but in times of hardship as well. Strong and well-experienced management can turn a company around and provide returns to shareholders over long periods of time.

A prime example of strong management is the late Steve Jobs of Apple Inc. (NASDAQ/AAPL). It’s not a hidden fact anymore that, taking the company from the verge of bankruptcy, Jobs was able to make decisions and bring products to the market that were appeasing to the consumers. As a result, at one point, Apple became the biggest company (as per market capitalization) in the world.

Competitive Edge/Uniqueness

If a company has a certain unique aspect to its business, it can be profitable for the long term and could provide shareholders with great returns.

Consider Wal-Mart Stores Inc. (NYSE/WMT), for example. The company prides itself as a retail store for cheaper goods. It has done this by lowering costs, adding inventory management, and other such changes. Wal-Mart has earned its name in business and, at the same time, has provided substantial gains to its shareholders over time.

Industry Analysis

This is possibly one of the most important non-financial measures that can provide investors an idea about the long-term growth of a company. Consider the cassette, or even the floppy disc. As technology emerged, firms that were involved in manufacturing these two products had to either move towards different products or face losses due to declining demand.

If you are looking to invest for the long term in a company in an industry that has been collapsing due to new technology or other factors, you are bound to face losses, regardless of whether the company has strong management or a competitive edge over other manufacturers.

Instead of just focusing on the financial measures to evaluate a company, you must also look at the non-financial measures, because they provide useful information about a company’s long-term growth and profitability.

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