What is the fundamental difference between a successful company and a failing company from an investor’s point of view:
- Product quality
- Work environment
- The attractiveness of the sector
- Strength Partners
All these things are important, but they are not the test! There is one indicator that decides the matter!
The indicator is: “Economic Value Added”
Does the company achieve a return more than the cost of its money? Understanding the index and how it is calculated, and the appropriate periods can be learned, but the paradox that it is completely absent from the common financial indicators! Perhaps for its difficulty. The calamity that there are managers of listed companies do not know the cost of their money originally.
The successful company will achieve a higher return on the cost of its invested funds, and you will find a way to re-invest part or all of these profits to double the value of the stock in each economic cycle of two, three, four and more. So, the time works in favor of the investor and takes advantage of the strength of the accumulation effect.
The failed company achieves accounting losses or profits but less than the cost of its funds. Here is the time when a thief can steal and destroys the wealth of his staff. The investor here is looking for hopes, either a new management change or strategy, an organization of the sector, entry of new activity, etc. Indeed, most losers do not change to profitability!
So, invest in a company that has a profitable history that exceeds the cost of money. Do not bet on the future of a company that has not achieved this before. If it proves itself, the market will give you an opportunity to buy the company. Because companies like horses in a race, bet on the strongest! The gambler coveting in the richness of his bet on a lean horse achieves a surprise.