Learning about shares: Study the form to pick the most likely winners

Olympic champ and new investor BARBARA KENDALL gets help from NZX's Dan Dividend.

Q. Barbara Kendall asks:

This week's question has been on my mind for a while. What makes one company a better investment than another?

A. Dan Dividend responds:

Good question. I'll call on an NZX Broker, Cam Watson from ABN AMRO Craigs in Tauranga, to look at some of the criteria that make a company stand out from the crowd as a potentially great place to put your money.

Cam says: Most of the criteria we'll address place companies in the broader context of their surroundings. External factors are just as important as what goes on inside a company.

Assessing a company's potential for growth is a good place to start.

The market for its product or service is growing

What's in fashion now? What product or service is everyone talking about?

Is there something that's made your life so much easier recently that you couldn't imagine being without it? What company makes it? Chalk it up as an investment possibility.

It may be less obvious than that. Population trends, social factors, changes in government policy and shifts in the economic outlook can and do alter the demand for products and services in a range of industries.

It's the leader of the pack, or on its way there

Is the company the leader in its field - the one that constantly outperforms its rivals? These companies are easy to identify because they come up with the best innovations first.

Companies which are growing their share of the market also fit into this category.

Keep an ear to the ground and you'll notice plenty of businesses that are steadily winning votes from customers and the media. This is a good sign of potential future growth in profit and share price.

The next criteria we'll look at fit under the umbrella of a company's risk profile.

Leverage

A company which has borrowed heavily to finance its assets (recall debt to equity ratio from last week) is highly leveraged.

Something of a double-edged sword, leverage increases the potential return on investment but it also increases risk.

A company might borrow significant cash to finance a takeover. This isn't necessarily bad - many companies take on debt for projects that increase value for shareholders.

But it's great if a company can avoid the risk of borrowing large amounts. A company that can fund initiatives using some profit and some borrowings, without substantially increasing its risk profile, is a strong candidate for your dollars.

Solid business strategy

A company should have a well thought-out business plan which communicates a clear strategic direction. Think of it as a company's CV.

Prospectuses and annual reports should give you key messages about the goals in the business plan. After all, these documents are important company tools for trying to sell you on its shares.

Competent directors and managers

Let's have a look at the people behind the business. Are the directors and managers well qualified to grow the business? Are they true and committed champions of the company?

Do they hold a significant number of shares in the company? If so, they have a vested interest in making the business succeed. That's a good thing.

These are just a few of the many trademarks of a good investment and, of course, there are many other risks that companies face. Talk to your NZX broker for more information. There is a list of firms at NZX.com.

* GOT A QUESTION? Feel free to email Dan Dividend with your questions

* NEXT: How to keep tabs on what companies are up to.