How to evaluate the long-term growth prospects of the companies for investing?

How to evaluate the long-term growth prospects of the companies for investing?

This is where the Fundamental Analysis of a company comes in. You need to understand how the company makes money, how it uses it and how it shares the earnings back with the investors. Here are a few points to guide you.

1. Average Free Cash Flow (FCF): Keep an eye on the FCF of the company. Ideally the FCF should grow over time.

2. Debt: Most of the companies rely on debt to expand their business. Hence not all debt is bad. However, keep an eye on the interest payments that the company repays. If the interest is more than 30% of the Operating profit, then the company’s earnings are eaten away, and nothing is left for the investors.

3. Buybacks/Dividends: A company must become profitable in the long term and must reward its shareholder in some ways. There are usually 2 ways to this. Either the company buys back shares leaving a lesser amount of outstanding shares, thereby increasing the ownership of investors or its pays dividends. A company doing neither of this, must be carefully reconsidered and the investor must find out where is the company parking its earnings.

If the fundamentals of the company sound good, then finally, the investor must figure out the intrinsic value of the company shares. There is a popular 2-step Discounted Cash Flow Model used to figure this out. It has proven to be accurate in my investments and I highly recommend that you do the math before investing.

- Mudit ‘Moody’ Agarwal.