Image by: 401(K)2013
By Michael Sterling
When a company is biting off more than they can chew, there’s a likely chance their future lies in the gutter. Most of the time, business owners try to be innovative and jump too early into important decisions and promises to customers that they can’t afford yet. Depending on the kind of service these companies give, it can be quite transparent how the money is going to return.
Money has an international language. The rules are always the same, if you don’t have more inflow coming in than outflow going out, it’s just a matter of time before you land face first in a pile of your own debt. When asking yourself about stock market returns, the answer can be simple. Look at where the money is going!
Look At The Net Income
Every public company is required to put out a statement which is their revenue, minus all their expenses – like salaries, taxes, shipment costs, etc – and once it is all taken out, the number left over is the profit, or Net Income. Obviously, investors love to see companies that have a consistent profit.
Naturally when a company is producing a great Net Income, the stock prices are going to rise and the shares will be worth more. Most start up companies have a lot of debt to pay off and often spend more money than is coming in, making their cost exceed the revenue – when this happens, they have No Net Income. This can happen in a very slow or fast process.
An example of this is Amazon. Their net income fell in this first quarter, despite the revenue rising 22%. Last year their revenue was $13.19 billion, this year it rose to $16.07 billion. Now look at their net income which was $130 million last year; this year it was 37% lower at $82 million, going from 28 cents per share to 18 cents. This is bad for the shareholders.
Due to the fact that Amazon had been so dedicated to costumer satisfaction this past year with shipping orders, rights to digital content, taxes, distribution, and manufacturing, they took away more money from the revenue. Although this could be good for the customer, it’s not good for the shareholders. The idea is to make money.
Just because a company is giant, doesn’t mean they are going to make you money in the stock market. A lot of these companies don’t know how to spend their money – they focus on trying to “stay afloat” that they can often forget where their assets lie. Do some research on the company and what they tell their customers.
The bigger the size of their clientele, the more they have to spend to satisfy all their needs. If they are promising unsatisfied customers their money back, this can be a factor in their net. Customer service is always top priority in companies. It’s what keeps them coming back – and when you own a piece of their company, you should care too.
However, to make money in the stock market you need to investigate whether the company is spending too much money on making their clients happy, advertising for new markets, or promises that they can’t keep – basically, spending their money with not much returns. Think of the financial outcome ahead of time.
Dont Get Ahead Of Yourself
Don’t assume in January that a company is going to rise or fall – it’s too soon to tell. Short term estimations are much more accurate. Companies can turn around very quickly with the smallest of budget cuts. Another important thing to do is not to compare companies with other companies. Every business is different and do not share the same fate.
Most stock market forecasters that give their two cents about which companies will thrive and fall are most often wrong. Think about where your money is going – take it in your own hands. It’s not rocket science to consider the simple mathematics of it all, and I realize that other factors are involved in stock market returns, but with this logic of thinking it makes it more easy to have a reason behind your decision instead of listening to what forecasters have to say.