One thing I have come to learn from the richest men in the world is the consistent fact that wealth is multiplied majorly through investments. Robert Kiyosaki, when writing on why the rich gets richer, says in his book ‘Rich Dad, Poor Dad’ that “A review of my rich dad’s financial statement is why the rich get richer. The asset column generates more than enough income to cover expenses, with the balance reinvested into the asset column. The asset column continues to grow and, therefore, the income it produces grows with it. The result being: The rich gets richer!”.
Being able to discover a profitable opportunity is an asset one must possess because opportunities come and go. An opportunity can be defined as a chance of advancement, progress or profit while an investment is an asset intended to produce income or capital gains. Investments can be stocks, bonds, treasury bills – anything an investor believes will produce income (usually in the form of interest ) or become worth more.
According to Sapling, “An investment opportunity is any situation where you have the option of purchasing something that has a chance to gain value in the future. Business investment opportunities are different from investment prospects, which refer to possible future investment opportunities. The key to making money through investing is knowing which opportunities to take advantage of and how to manage them.”
There is a deep well of investment opportunities open to potential investors but not all are good investment opportunities. Here are a few green light signals to look out for when searching for a viable investment opportunity;
- Growth Prospects – Before investing in that company, take time to analyze the company’s financials and prospects. Is the company in a growing industry? What is the company’s specific growth rate in relation to the market? A company positioned in a growing industry and growing at a faster rate than the industry is one to watch out for.
- Profitability – Growth in top line (revenue) is often not sufficient to deliver returns for an investor like yourself. Instead, the bottom line (profit after tax) refers to the funds that belong to the equity investors. When assessing the profitability of a potential investment, one should look that the company’s profits over the years. Have they been growing? Have they been consistently growing, or have they been fluctuating? Is this driver of this profitability sustainable? Note: One also has to be careful not to make a decision solely on historical numbers. For example, if a company has just taken out an expensive loan, the higher finance cost can negatively impact on future profitability. However, for companies at the early stage of their life cycle, poor profitability history does not necessarily signal a bad investment — think Amazon, think Facebook.
- Regulatory Environment – Favorable or unfavourable government regulation can make or break the prospects of an industry and thus your investment. You want to investigate the current regulations in place and the likelihood of favourable or unfavourable regulations in the future.
- Dividend Payment – Returns to investors come in the form of capital appreciation or dividend payment. Dividend is a sum of money paid by a company to its shareholders out of its profits or cash reserve. An investment with a good track record of dividend payments can be worthwhile especially for investors who require liquidity to fulfil certain liquidity needs.
- Competent Management – An investment in a company is an investment in people. Make sure to do your due diligence to ensure your money is in capable hands.
It is important to note that a company might not fulfil the above stated signals but should cover at least three. While no one can guarantee success in investment, a company that meets most, if not all, of these criteria exponentially increase your chances of a successful and profitable investment.
In conclusion, when you look at a potential investment opportunity, you should see yourself in its future as a satisfied and contented investor.