Steps in Evaluating Company You Want to Invest In

Omolabake Fasogbon

In an economy full of uncertainties, the idea of investing to build wealth comes very handy. Sadly, not a few Nigerians have lost fortune to wrong investment choice in recent times.

According to the Nigeria Deposit Insurance Company (NDIC), Nigerians have lost not less than N911.45 billion to various Ponzi schemes and related frauds in the last 23 years. Although, Ponzi schemes mostly and readily come to mind when pointing to unsafe investments, many are other decent looking businesses that are but wolves in sheep’s clothing.

An education entrepreneur, Dr. Abiodun Babatunde, recently learnt lesson after his N25 million got stuck in his friend’s microfinance bank which is presently on the verge of folding up.

Babatunde, had ignored necessary precautions and investigations he ought to have done before risking the whooping sum. The money he had borrowed from the bank in 2020, originally intended to execute a major project. 

“I initially wanted to inject the money in a project in 2020 during COVID-19, but because I couldn’t secure regulatory approval and I didn’t want the money to lie fallow, I decided to invest it in a trusted friend’s microfinance bank. 

“I was so comfortable because he is my friend. Of course, we agreed on a monthly interest rate which he was faithful, not until recently when I requested for my capital that he was reluctant.

Babatunde’s chances of retrieving his money looks quite slim, not only that the company is folding up, but also lacks regulatory and insurance backing. 

Beyond ascertaining a company’s status with the regulator and its insurance standing, Managing Partner at Empyrean Professional Services, Mr. Bamgboye Emmanuel, highlighted more elements that Babatunde and any other aspiring investors should consider before doing business with any organization to avoid running into loss. 

He disclosed that organisation’s audited account and the tool of Google are viable platforms investors can engage to track a company’s details in relations to the factors below:

Business Ownership/Structure

This has to do with a legal formation of the business. An investor must be well informed about this formation which could either be a sole proprietorship, limited liability company, partnership or a business name. For instance, a business name carries more risk while a limited liability company has a distinct legal personality that is quite different from others. 

Employees Benefit

It is necessary to check out the packages available for the employees of an organisation. Are these package realistic and in tune with modern reality, are they well spelt- out and transparent enough in the financial statements of an organisation? A would be investor must find answers to these questions before leaping. 

Litigation History

It is also important to determine the legal reputation of a company. Check if a company has been involved in legal dispute that may cast doubt about their ability to in a foreseeable future, if they have been involved in any dispute, find out the legal implications of the litigation, and more. 

Tax Information

Check if the company has always been tax compliant. This means checking the tax antecedent of a company to know if it has been filing tax regularly. Also, if it is in good terms with the federal and state inland revenue and If such organisation is good corporate citizen. The discovery here will determine the credibility of such a business. 

Value of Current and Non-current Asset

A company with a very good solid asset base will able to stand any challenge and remain afloat. Companies like Union and FirstBank are leveraging their strong asset base because they have been in existence for a very long time and have been able to acquire so many assets. 

Insurance Coverage

How covered is the asset base of the prospective firm? An investor needs to look for how protected an organisation is against fire outbreak, litigation and many other elements that might affect the smooth running of the business.

Customer Information

Of importance too is diving into the company’s customers’ information. An investor must take extra step in researching on the strength and credibility of a company’s customers. This is essential to have an idea of company’s revenue streams, market position, growth potential and their financial health, amongst others. 

Capital Investment

This can also be linked to value of current and noncurrent asset. When checking the financials of a company, it is important to find its capital investment. This helps in determining the viability of an organization. Specifically, an intending investor can be able to assess a company’s scalability, understand its cost structure, envision its potential Return on Investment (ROI) as well as be able to assess risk involved. 

Regulatory and Compliance Issues

Beyond being tax compliant, an organization must be socially responsible in terms of pension payment and commitment to environment and the country. An investor must take a holistic look at all of these before giving a nod. 

Intellectual Property

This is also part of an organisation’s asset. Intellectual property includes assets without physical substance. An organization must possess both physical and intellectual property. Organizations like First bank possess both and have been leveraging this over the years.  An investor must endeavor to know an organization’s value in terms of patient and goodwill, More so, the strength and viability of its intellectual value. 

Revenue Base

This can be assessed from an organisation’s financial statement. With this, you can be able to track an organisation’s performance and probe the trend of either profit or loss of revenue. Once you notice a trend of loss, that is a red flag that should be a cause for concern. 

 Industry Trends and Analysis

Also to note is comparing the activities and performance of a company with prevailing industry realities. Understand the ranking of the organisation and performance, compare with other players operating in same industry 

Offerings

Check out if a company’s products and services are needed in the market. Ask yourself if these offerings are sellable and competitive. A product or service must be relevant and able to stand the test of time. Also to note is whether such products possess required license and align with government policies.