Understand the business model. Knowing if a company leverages tech-
nology, people, or hard assets will provide insight as to the kind of finan
cial results the company may produce.
Look for scale and operating leverage. These characteristics can provide
significant barriers to entry and lead to impressive financial performance.
Look for recurring revenue. Long-term customer contracts can guarantee
certain levels of revenue for years into the future. This can provide a
degree of stability in financial results.
Focus on cash flow. Investors ultimately earn returns based on a company's
cash-generating ability. Avoid investments that aren't expected to generate
adequate cash flow.
Size the market opportunity. Industries with big, untapped market
opportunities provide an attractive environment for high growth.
In addition, companies chasing markets perceived to be big enough to
accommodate growth for all industry participants are less likely to compete
on price alone.
Examine growth expectations. Understand what kind of growth rates are
incorporated into the share price. If the rates of growth are unrealistic, avoid the stock.
