What is an excellent business to invest in?
If you are looking to invest in a business there are certain questions that you should be asking.Too often investors are eager to jump on the trail of a seemingly popular business only to find out that the underlying structure is less then desirable. Smart investors will take the time to ask the right questions to determine if the business they want to invest in will offer them a potential for long-term profits.Armed with the correct information you will be more likely to build a portfolio of wealth.Here is what you need to know if you are wondering what an excellent business to invest in is-
- An excellent business will have a durable competitive advantage- Successful businesses are able to succeed so well because they have durable competitive advantages or in other words things that their competitors can not reproduce. It is important to keep in mind that sometimes these advantages are easy to spot however; it is also possible for them to remain buried. When you buy into a company through the purchase of its common stock, you should try to identify the durable competitive advantages it has that could stand up from attack by competitors and market forces such as outsourcing and increased globalization.
- An excellent business already earns high returns on capital with little or no debt-There seems to be little doubt, that it's easier to build a large net worth through value investing.In other words the disciplined purchase of stocks, bonds, mutual funds, and other assets that appear to be selling at a substantial discount to a reasonable person's estimate of intrinsic value (or "the real" value.) The one major shortcoming of this approach is that an asset bought cheap must be sold when it reaches intrinsic value unless it is an excellent business.
- An excellent business is scalable-When businesses are highly successful, one of the key ingredients more often than not is scalability. History has clearly shown that all excellent businesses are that in part because they had products or services that could be replicated in cookie-cutter fashion very, very rapidly. For example, a McDonald's in Hong Kong is very much a like a McDonald's in Chicago or New York.The bottom line is that by having the menu, layout, fixtures, and technology packaged in a way that restaurants could be rapidly opened, it made it easier for the chain to roll out across the United States and around the world.This in turn coupled with its relatively high returns on equity and the cash provided by the franchisees, (who footed the bill to build a huge portion of the overall business); it's not hard to see why the shareholders might consider Ray Kroc as a hero.
- An excellent business still has an excellent price-During the 1950's-1960's the idea of buying excellent businesses was taken to such ridiculous extremes in thethat investors paid upwards of sixty and seventy times earnings! To contrast, a normal price-to-earnings ratio on Wall Street today is considered fifteen; in other words for every $1 in per share profit a company generates, it would trade for $15. It is not hard to see that even if the business was all it was cracked up to be, at those prices, it would be virtually impossible to earn a satisfactory long-term rate of return. The bottom line is that a company's lower growth rate can actually lead to higher rates of return in certain circumstances.Determining if the business is correctly priced for investment is still key to making long-profit. Do not allow yourself to be sucked in to paying to much for an investment that could very well never pay off.