A Need To Know Basis
Too often investors buy shares in a stock armed with little more than the ticker symbol and a tip from a friend at work. Why not arm yourself with the best possible information, especially when it is all there at your fingertips for free? Here are the bare bones factors that are important to know about the company you are going to invest in, and how they can impact the prices of shares.
Revenues
This is how much money the company is making. Many penny stocks may not have revenues at all if they are in the development stage, or if they are trying to bring a brand new product to market. However, if the company has been around a while they had better have enough revenues to offset some of the costs.
If the company is in its growth stages, there has to be an increasing trend in revenues. If they are trying to gain market share, or break into new markets, their success should be tempered with improving revenues.
Earnings
Of course, revenues are just a precursor to earnings. All companies want to eventually make money, and it is when they start bringing in more revenues than costs that all the magic happens. Positive earnings can have an excellent effect on penny stock companies, because they are suddenly on their way to becoming something more.
If a penny stock is not heavily funded from external sources, or they don"t have a significant cash position, they need positive earnings to stay afloat, fund ongoing operations, and take advantage of their intended strategic options.
Debt
Some companies can get saddled by enormous debt, especially in their start-up or early growth phases. This can be detrimental in many ways, as interest payments can cut into earnings, and creditors can pull strings at inopportune times, effectively sweeping the feet out from under a fragile company. There are also issues of control, and dependence.
Until a company"s revenues out-pace expenses, debt will continue to grow. Unless, of course, the company raises capital through other means such as dilutive stock offerings, or by giving up significant control to venture capitalists.
Assets
All of the cash, inventories, and property of a company have some value, and can give you a quick glimpse of the health and position of a company. For example, if they have six million in cash, with yearly costs of one million, you could assume that they would be able to meet their operational requirements for a long time.
If they had significant miscellaneous assets, they may be able to sell these off to raise capital if they needed. However, if their assets are well below their liabilities, the company will likely need to find a quick source of financing to meet their obligations.
Liabilities
Here is how much the company owes or needs to pay out. The lower the value the better, especially when compared to assets. There should almost never be higher liabilities than assets. In fact a ratio of 1:2 is standard in some sectors, to give a company some breathing room.
The Bare Bones
Without at least this basic understanding, it is unlikely that you have enough information on the stock you are interested in. Sure, its great to jump on board a stock with a good story, but if you dig a little deeper you may find that the company actually has a great story, or has some underlying problems that the average investor may not know about.