5 Indicators of a Viable Investment Opportunity

Investing can be described as putting money aside while you are busy with life, and having that money work for you so that you can reap the full benefits in the future.

The purpose of investing is to deposit your money into one or more types of investment vehicles in the hopes of increasing its value over time.

When it comes to beginners looking to gain investment experience, the Nairobi Stock Exchange (NSE) is a good place to start.

If working on a limited budget, one could try putting 1% of his/her salary towards the prefered investment avenue. The truth is, you're unlikely to notice a contribution of that size.

When looking for the ideal firm to invest your hard-earned money in, it's helpful to start with a strategy that points you in the correct direction.

In this post, we'll go through how to get started as an investor and how to maximize your profits while lowering your costs by paying attention to the basic indicators of sound investment.

When you are ready to invest in the NSE, and searching for the right company to invest your money into, it helps to begin the process with a strategy that will help guide you toward worthy investments.

We can break down the key indicators into 5 things that need to be examined before pouring money in the stock market namely: Cash Reserves, Dividends Record, Debt Status, Cashflow Levels, and Management Competence.

Management Competence

Before investing in any firm, attempt to learn as much as you can about the management team.

A company may have all of the necessary resources but no idea what to do with them. It's vital to keep in mind that when you buy stock, you're buying into a company rather than a piece of paper.

In order to manage their assets and obtain the highest potential return on investment for shareholders, companies require strong, intelligent, and capable leadership.

Safaricom is a great example of a company with great management and leadership. Over the past decade, the telco has propelled itself to a position as one of the region's largest, most profitable companies. 

More than 80% of overall investor wealth at the NSE has traditionally been held by Safaricom, Equity Bank Group, East Africa Breweries Limited, KCB Group, and Co-operative Bank.

Cashflow Levels

Operations, investing activities, and financing activities all have an impact on a company's cash position.

While a rise in cash as a result of any of the three activities outlined above may appear to be a sign of excellent financial health, this is not necessarily the case.

The change in cash position under operating activities is the most essential indicator of a successful cash flow statement. 

When a firm increases its cash position through operating activities (selling goods and/or providing services), it demonstrates that the organization can create revenue based on structure, demand, profit margin, or a combination of factors. 

Debt Status

Most people understand that if you have more debt than cash, you have probably not managed your personal finances correctly.

Careless borrowing and reckless spending can quickly get you into a lot of trouble. The same is true for any company, organization, or government.

Invest in companies that have their financials in order if you want to invest with a lower risk of capital loss. 

If a company has significant debt and other obligations, it will need to devote cash and future earnings to debt repayment.

Companies with limited debt, on the other hand, can pay or increase dividends or stockpile cash for strategic future investments.

Dividends Record

There are a number of elements to examine in addition to the dividends offered by the firm.

The most important question to ask is whether or not this company's yield is consistent and sustainable.

First, does the company have a long, proven track record of paying dividends on time?

Second, look at the dividend growth rate of the company over the last five years, or possibly even longer.

Finally, look at a company's payout ratio. 

Divide Dividends per Share by Earnings per Share to get the payout ratio, which shows what percentage of a company's earnings are paid out to shareholders in the form of dividends.

Companies with a high payout ratio may not have much room for dividend growth right now, but they might still be a good investment opportunity.

Companies that pay dividends but have a smaller payout ratio, on the other hand, are more likely to raise yields to investors in the future.

Cash Reserves

Cash is a valuable asset for every business. It doesn't take a genius to figure this out, but it's also a good sign of a company's business plan and management.

The strongest incentive to invest in organizations with large cash reserves is that it shows the company is ready for expansion.

Significant cash reserves enable a company to pay off debts and other obligations or reinvest the cash back into the business.

Stockpiling cash to develop new products or expand the current business can boost share prices and help you achieve a capital gain.

All in all, before plunging into the Nairobi Stock Exchange as a first timer, it would be wise to get advice from more experienced investors.

Also, as a basic rule, always keep an eye on the news and pay special attention to what the companies you are potentially looking to invest in are up to.