Before few years, we all were unaware of the word called “Bankruptcy”. But now it is a popular word and hardly there will be anyone not knowing what it is. we all have witnessed firms, corporate companies going bankrupt.
Now, when it comes to investing our hard-earned money, we often think that what if a company goes bankrupt? In that case, what about my money? So, now the days’ security of money has become important. It has become a need of an hour.
Before doing any investment in any firm, there are some things that we should properly check to make sure that our money is in safe hands.
What firm/company does and why it is better than the competitors:
Before doing an investment, you have to check what are the functional areas of the firm. Who are its competitors and why it is better than its competitors etc. things should be considered.
People who are elected as board of directors and Managing directors are qualified to manage your funds should be checked. How much trust you have in them is important as decisions that will be taken by them will affect you too.
When the firm is new, its debt ratio will be lower as investors like banks, etc. will not be much confident in lending money to the firm. So, a higher debt ratio and lower equity ratio can be a sign that the firm is reliable and it has the confidence to pay the borrowed debt.
Dividend payout-retention ratio:
A firm with a high profit generally retains less money in the business as the requirement of working capital is less. A higher dividend payout ratio can be considered as a good sign of a firm’s stability.
Lower growth and more focus on market share:
Strong firms focus on the long-term and in the short run, they may occur losses. Their main focus is to attract and retain customers. So, if you are investing in a firm that is not that profitable but has chances to grow due to a good customer base then, it can be rewarding for you in the future.
Where does it has invested:
The firm you are going to invest, where it has invested so far and what are their plans regarding investment etc. should be checked.
Sector’s growth expectation:
The sector in which it has invested is growing currently or not and what is the expected growth rate of the sector needs to be assessed.
There is a wise saying: “Don’t put all your eggs in one basket”. It means you should invest your money in different places and not in only one. It will help in reducing the risk of default.