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Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
In our quest to build a winning stock portfolio, steady and increasing come takes center stage.
Here's why companies with consistent or increasing income are gold for your portfolio:
Predictability: Companies with a steady or rising income stream offer greater predictability in terms of future earnings. This allows you to make informed investment decisions with a clearer picture.
Stability: Consistent income translates to financial stability for the company. This makes them more resilient to economic downturns, protecting your investment during market fluctuations.
Growth Potential: Companies that consistently increase income often reinvest their profits back into the business. This fuels further growth, potentially leading to a rise in stock price over time.
Dividend Payouts: Companies with strong and growing income are more likely to distribute a portion of their profits as dividends to shareholders. This provides you with a steady stream of passive income.
How to find the Income figures for companies?
You can find up to 10 years of past Income in sites like Stockanalysis.com.
Search for company you are interested in analysing, and look under Financials > Income Statement > look for Net Income.
Fortinet's Income figures has been on a predictably increasing trend in the past 10 years which is a very good sign for its investors.
Guideline: Favor Companies with Net Income Growth higher than your targetted rate of returns.
As a rule of thumb, when using the P/E ratio as a valuation metric for the company that you are evaluating,
you should be favouring companies whose Net income is growing higher than your required rate of annual return.
So if the stock price increase at the same rate (15%), its valuation from P/E standpoint will not become more overvalued.
However, if your required rate of annual return is lower, say 10%,
then a company which is expected to grow their net income at 10% will be considered good too.
You can also find useful Net Income CAGR charts of various periods from financecharts.com
What About Companies which are not yet profitable, how do we analyse them?
Not all diamonds are polished right away. Some companies, particularly young ones, prioritise growth over immediate profitability. They might be reinvesting heavily in areas like:
Sales & Marketing: This helps them capture new market share and establish a strong brand presence.
Research & Development (R&D): Investing in innovation is crucial for staying ahead of the curve.
So, how do you identify promising non-profitable companies? Here are some key metrics to watch:
i) Profit Margin Trend: Even if negative, are their profit margins trending towards positive territory? This suggests they're on the right track to convert revenue into profit.
ii) Rule of 40: This unofficial metric adds a company's growth rate (CAGR) and its profit margin. A score above 40 indicates the company is achieving both growth and profitability (or on the way there).
iii) Cash Flow: Healthy cash flow ensures a company can meet its financial obligations and continue operations while investing in growth.
iv) Debt Figures: High debt can be risky for young companies. Look for manageable debt levels that won't hinder future growth.
Remember however that investing in non-profitable companies is inherently riskier.
Do your due diligence and only invest in companies with a clear path to profitability and a strong business model.
Conclusion: Steady Wins the Race (But Don't Be Afraid of Young Blood)
While consistent income is a golden ticket for portfolios, don't dismiss exciting new companies! Focus on building a balanced portfolio. Combine reliable income generators with promising young companies showing strong growth and a clear path to profit.
Remember, research is key. By understanding a company's health and future, you can make smart choices and unlock your portfolio's potential.
See you next time for more.
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