Want to move safe with money or big money? From our childhood we learn & are been taught a wrong lesson that as an investor one must choose either. Most of us believe that if you want to earn big, then you must take equally big risk. Not really! In fact world's most successful investors handled this by managing the risk & turning it into a big success. Here is how they do it,
First, find a company with low capital needs. These companies can multiply their revenues every year without matching growth in capital expenditures. They have a very simple product which does not require a special R&D division.
Best real-time case is Cisco spends 13.4% of its gross revenue on research & development, while McDonalds spends nothing on it. McDonald's can expand itself by opening new stores & by marketing; also its product won't go out of date. Like all other high tech companies Cisco has to keep itself abreast by doing the continuous innovations & improvements to stay ahead in the market. We are not rejecting Cisco and recommending McDonalds here. We are trying to point out those huge and regular capital expenditures that keep on dragging company's ability to return cash to its shareholders.
Companies with sound brands can also keep their capital spending low. This means that they can still keep their profit margins high regardless of its cost. There is something called competition which makes to cut the prices, but what if customers are crazy about your brand? Certainly! They will buy it no matter you increase its price. This infers to higher profits by keeping the capital spending very low.
Second step is to; find businesses which holds high return on assets (tangible). Management must put utmost efforts in order to make company's assets productive, no matter those assets are borrowed or owned.
One must also be aware about intangible assets or in other words goodwill (company's reputation amongst its customers).
We are sure this article would have surely given some fair ideas about buying stock & points to ponder while doing so.
