1. Business model:

When looking at a business model of a company, you’re essentially looking at how they generate their revenue. For example, a cinema’s main activity is playing movies for its audiences, but that only generates a part, if not a bit, of its revenue.

Their main money-making business is their snacks and beverages stand. So, when you’re thinking of investing in any company that runs cinemas, apart from seeing how good the movie experience is, you should also have a dip at their popcorn and see if it tastes like money or not.

One way that you can look into whether a company’s business model is good or not is by looking at its gross profit, cash flow, or net income.

Essentially, what you want to be looking at here is a company that actually makes a profit, regardless of how grand the company represents itself.

However, if the company is fairly new, it is normal for them to spend more before actually generating income — what you need to look at is the cash flow, whether their spending can justify the prospect for future growth or are they excessively spending for things that brings no impact to their growth.

2. Competitive advantage:

Another thing that you may want to look at is how the company stands among its peers. Do they have a competitive advantage in the industry? For example, you’re thinking of going for Artificial Intelligence (AI) stocks. There are many startups, and many existing players as well that are actively developing their AI technologies.

In this bustling industry, you can perhaps evaluate which company holds a better competitive position than its peer — and it can be subjective. Some companies may dominate in terms of capital, but some other small firms may have the expertise — say, Company ABC is a big tech firm with billions in market capital, but they may be less positioned in expertise as Company DEF, a small tech firm, which employs a mad-genius AI expert.

As for this, it is quite hard to tell who is actually holding what card up their sleeves, as it’s a poker table where many are putting up a bluff, what you need to do is too sift through the noises and marketing campaign to see how well these companies are put.

3. Management’s background:

It is important for an investor to look into the management’s background. The executive officers, board of directors, and managers. At this point, you’ll have to ask questions. Who are these people? Do they have the expertise to handle whatever it is that they are positioned for? Do they have the experience to be sitting in that position? Were they involved in any scandals, allegations of crimes, or wrongdoings?

You certainly don’t want to have your money in a company led by ravening wolves.

4. Business ethics:

Next, you will also have a look into the business ethics of a company. Are they involved in any unethical practices such as unfair business practices, unfair business terms, or even down to illegal practices like bribery?

Sometimes a business can be doing legal practices, but it can be unethical. Say, an airline company puts in its terms and conditions that they have the right to reschedule their flights without any compensation to the passengers — it is fine when the rescheduling is not too often and is done for technical reasons, but imagine if they make it their business model to overbook a flight, and the rest of the passengers will be ‘rescheduled’ for the next flight, they’ll be making more angry customers than money!

5. Corporate governance:

The next thing that you might want to look at is how the corporate governance structure is at the company. How were the directors appointed? Is it through favoritism or is it based on merits? Is the organization structure well established or is it haywire? How transparent is the company to its investors?

All this information is not very much out there, since no company would go out and shout “we are doing some shady things here!”, your best bet is to do some digging online to see if there’s any information on undesirable practices.

One of the places you can go is to the websites that provide a platform for employees to review their employers like Glassdoor (this is not a paid promotion) or any other website of the like.

6. Industry:

In terms of industry, what you need to evaluate is how big is the market base, how would the consumer base look like, how big is the company’s market share, how well can the industry grow over time, etc.

This is important because you need to know the ‘playing field’ that the company is in. For example, you’re going to invest in a mining company, but the one you’re going for is a new company that looks to mine coals.

With all the ESG movements and concern for the environmental effects coal can bring, the company may not be your best bet yet — even if coal is going to last, there are many other big companies with better facilities and utilities that can bury this new company.