Stock market investing has a lot of potential if you pick a company with strong fundamentals and keep a long-term perspective. The first step in determining the strength of the fundamentals is to assess the company’s strengths, weaknesses, and future growth prospects. While there are several methods available to assist you in doing an assessment, the SWOT analysis is one of the most extensively used. The SWOT analysis for equities assesses a company’s investment potential from the following perspectives: –
The initial stage is to assess the strength of the business you’ve chosen. Successful businesses have been able to capitalise on their strengths to become market leaders in their fields, resulting in potential investment opportunities. The following are the essential variables to consider when assessing a company’s strength: –
- Management, which includes promoters and staff.
- Goods and services (quality of the product, criticality in the value chain, research & development, patent, and the likes)
- The margins (sustenance of the margins vis-a-vis the competitors, importance of the product, substitution, etc.)
- Client base (customer loyalty, brand loyalty, etc.)
All businesses and markets will have their own set of advantages. Many technology and pharmaceutical industries, for example, rely on patent protection for their products. These patents, on the other hand, are given as a result of individuals, research, or possibly good purchases. It’s critical to understand why and evaluate the advantages.
In conjunction with the company’s strengths, there may be certain areas where it falls short. Some of these flaws can be corrected, while others that are more significant can make or break the company’s future growth chances. While assessing a company’s flaws is a difficult undertaking, the annual report is one tool that might help. Companies frequently disclose contingent or prospective liabilities in their financial statements. Aside from that, there are a few more things to look for while evaluating flaws.
- Product liability
- Lack of research/innovation or a slow pace
- Unstable management or diminishing promoter interest, such as diverting funds from corporate resources, quick departures of key staff, regulatory non-compliance, frequent defaults, and so on.
- Intensity of competition
Individual investors may find it difficult to understand. This basically suggests that there are prospects for this company to expand or boost profits for shareholders. Some businesses can benefit from easy-to-spot macroeconomic factors. Other companies, on the contrary, may find it difficult to identify them. While evaluating on the opportunities front, here are a few things to look out for:-
- Expansion opportunities in terms of product offerings also as geography.
- External opportunities like mergers or acquisitions, a replacement segment, new industries, etc.
- Macroeconomic factors like lack of resources or an abundance of an equivalent, etc.
- Social trends and therefore the ability to adapt to an equivalent.
Check the management discussion and analysis portion of the annual report or the transcript call. Companies are required to declare their future growth plans, as well as how they intend to use the economy or sector’s growth to achieve their goals. This might provide crucial information about the company’s potential and how it intends to capitalise on them.
Threats are the last of the four points in the SWOT analysis of stocks. Every investor must consider the direct dangers to their assets, and the challenges that a firm faces can reveal a lot about the risk that your investments may face. Threats are essentially exacerbated flaws that have a direct influence on the company’s operations. The following are some of the common threats:
- Government legislation
- Direct competition
The notes to the financial statements might reveal a lot about the company’s potential threats and risks. A class action lawsuit against tobacco businesses, drilling bans for oil and gas companies, and the development of generic medicines for pharmaceutical companies are all suitable examples. Each of these scenarios shows a threat to the company, its profitability, and, as a result, the company’s investment.
SWOT has limits, despite being a useful planning technique. It’s one of various business planning methods to examine, but it shouldn’t be utilised in isolation. In addition, the points listed within the categories are not all prioritised equally. The disparities in weight are not taken into account by SWOT. As a result, more thorough research is required.