How to evaluate the growth potential of a company

For investors, one of the keys to the success of trading stocks is to understand what factors influence market expectations and how they can change over time. There are a number of factors that can affect the positive or negative feeling towards a company.

Growth forecast

The main driver of a company’s valuation is its capacity to generate income and, consequently, dividends. There are several ways in which a company can increase its profits over time.

1) Increase business activity
Companies can increase their sales by making an incursion into new markets, establishing partnerships and joint ventures , obtaining new contracts or attracting new clients, developing and launching new or better products, improving marketing and sales offer and many more.

2) The increase in prices
In positive economic times, some companies can afford to charge higher prices for their products if demand increases. This is particularly important in the case of resource producers in the bull commodity markets.

3) Cost control
A company can also improve its own profitability by reducing expenses, although those that do run the risk of cutting back on important aspects. To measure this, investors often study administrative, sales and marketing expenses, interest and depreciation as a percentage of sales to determine the efficiency of business activity management. Analyzing also operating income as a percentage of sales (margin) can also give us an idea of ​​the profitability of a company.

Risk of disappointment

It is important that investors recognize that, while companies can achieve great success, there are also many risks that could cause them to lose money and risks that can significantly reduce their business activity. The fear of obtaining negative results can limit the growth potential of the shares, or even cause their fall.

1) Operational risks
There are many problems that a company may have to face in the day to day of its administration, among them: breakdown of machinery, arrival of new competitors, price wars, increase in costs, adverse economic conditions, loss of contracts or customers and many more.

2) Political risk
This varies by country, but refers to the possibility of a government gaining power and implementing adverse economic policies, such as tax increases, new regulations, asset nationalization and other initiatives.

3) Foreign exchange risk or currency
Reserves operating in several countries run the risk that the rise and fall of the value of certain currencies may affect the company’s income or cost structure, and may increase or reduce the performance of foreign operations in terms of currency. national.

4) Legal risk
This refers to the possibility that the company is sued. This is especially true in sectors where there may be controversies regarding patents and intellectual property that could lead to important reparations or judicial requirements against business activity.

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