Although on a daily basis company quotes on the stock market fluctuate seemingly erratically, we must not forget that behind every ticker there is a company and an economic reality. In the long term, the evolution of a company's market value is inextricably linked to the development of its business.
The reality and present of a company is its financial statements.
Companies publish their financial statements periodically.
In it, the investor can see how the company's activities are developing. The data obtained allows us to understand the reality of real business. The information helps us understand if the company is making money, what performance it shows, how productively the company is using its assets, and what the current balance sheet is. However, the value of a company is always linked to its future.
Owning a business entitles us to an appropriate share of future benefits. From an investor's point of view, this is what has value. The exception to this way of thinking is when we intend to liquidate the company, in which case the value is calculated in terms of the money we can sell the assets for in the event of liquidation.
But, as a rule, investors invest in companies whose business will persist in the future. From the benefits and future growth will come the reward for the investor. Therefore, it is important not only to look at current performance, but also to have an idea of where the business is going and how it will develop in the coming years.
Vision presented by companies: strategic plan
Just as companies present their financial statements, they also present their strategic plans.
In the strategic plan, the management of the company informs the shareholders about the goals that they will pursue with their management. They also usually indicate some goals in relation to the results that the board believes can be achieved. In this way, investors can evaluate how reasonable it is to pay for the business at the current date. Let's look at an example of how a strategic plan and future outlook can (and should) affect our assessment of a company's current value.
To do this, we intend to pit two companies with the same past but different perspectives for the future. Both companies have the following characteristics:
Profit for the previous year: 100 million euros
Market capitalization: 1 billion euros
We assume that all other characteristics are identical (balance sheet, debt, etc.).
For next year, both companies predict that their consistent sales will continue.
However, one company announced that by adopting the new technology, it could improve its operating profit next year, while the other would continue to earn the same profit as before. The first company will make more money than the second, and therefore we should be willing to pay a little more for it now, because it will bring us more future benefits.
If, for example, the first company earns 110 million and the second continues to earn 100 million, investing in the first company will obviously be better. Therefore, a strategic plan is fundamental to try to understand the business and form reasonable expectations for the future of our investments.
Compare the past with reality
The saying goes that "he who promises much rarely keeps his word."
That is, it is one thing to say what needs to be achieved, and quite another to achieve it. It is important not only to look at the goals of the strategic plan of the company in which we are interested in investing, but to think about the likelihood of achieving them. The future is, by definition, uncertain, and no one knows exactly what will happen. The mission of the company's management is to try to improve their business day by day, and therefore part of their job is to have an optimistic vision for the future.
However, investors should combine this optimistic vision with a degree of skepticism and realism.
The Importance of Management
Company management is of great importance. Good company management can bring huge benefits to everyone: customers, consumers, employees, shareholders, etc. Board meetings help us understand what they think about the business and where they are focusing their attention on improving the company. As investors, we must never forget that the fate of our participation in the company is largely in the hands of the managers who run it. Your successful decisions will pay off, and your mistakes can be costly.
Conclusion
Reading and studying strategic plans submitted by companies helps us form reasonable expectations about where the company's business will develop and what the vision of its managers is. This information is very important in forming our own criteria for a company's potential as an investment.
DOWNLOAD
LOOK
Top Content of the Month
