There is no price low enough to make a poor quality company a good investment.

If you're in doubt about the quality of a company as an investment, abandon the study and look for another candidate.

When in doubt, throw it out.

Abandon your study and go on to another.  There is no price low enough to make a poor quality company a good investment.


The worse a company performs, the better value its stock will appear to be.

Because declining fundamentals will prompt a company's shareholders to sell, the price will decline.  This will cause all the value indicators to show that the price has become a bargain.  It's not!

When the stock is selling at a price below that for which it has customarily sold, you will want to check to see why - what current investors know that you don't.

Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.

Economies of scale:  refers to a company's ability to leverage its fixed cost infrastructure across more and more clients.

Operating leverage:  The result of economies of scale should be operating leverage, whereby profits are able to grow faster than sales.

Low ongoing capital investment to maintain their systems:

The combination of operating leverage and low ongoing capital requirements suggests that the firms should have plenty of free cash to throw around.

Telltale signs of good cash generation are dividends, share buybacks, and an accumulation of cash on the balance sheet.


E.g.  Technology-based businesses:  A desirable characteristic of technology-based businesses is the low ongoing capital investment to maintain their systems.  For firms already in the industry, the huge upfront technology investments have already taken place.  And the cost of technology tends to drop over time, so upkeep expenditures are minimal.  The combination of operating leverage and low ongoing capital requirements suggests that the technology-based firms should have plenty of free cash to throw around. 

Understanding Free Cash Flow (Video)

Read more: http://www.investopedia.com/video/definitions#ixzz1yiD0k3ZQ

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   Understanding Free Cash Flow

How to Find Great Companies to Invest In

Edited bySantosh and 5 others

 Warren Buffett

Ever wonder how successful stock investors pick great companies? Here are a few steps taken from the playbook of investing greats like Warren Buffett, Benjamin Graham, and Peter Lynch.

Steps

1. 1
   Stay within your circle of competence: You are best positioned to identify winning companies within your own field of expertise. If you work in retail, you are more qualified to decide if you should invest in companies like Walmart, Target, Best Buy, etc. than the latest bio-tech company.
   
   
2. 2
   Look for Economic Moats: There are some companies that manage to be virtual monopolies in their area. These companies have, over the years, succeeded in building a "moat" around them to keep their competitors away. They have a durable competitive advantage. Some examples of competitive advantage are:
   
   • Brand - Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands resulting in deeper profits.
   • High Switching Costs - When was the last time you switched banks? Or cell phone providers? Or cigarette brands, if you are a smoker? You get the picture here? Companies that have high switching costs can hold on to their customers a lot longer than companies that don't.
     
   • Low Cost Producer - Companies that are able to make products and sell them at phenomenally lower prices than their competition automatically attract customers - lots of them. As long as quality is not compromised, of course. Walmart and and Dell have perfected this concept to a science.
   • Secret - Large pharmaceutical companies with patents; companies that own copyrights, drilling rights, mining rights, etc. are pretty much the sole producer or service providers in their area. Again, these companies can raise prices without fear of losing customers, resulting in higher profits.
   • Scalability - This is a product or service that has the potential to network or add more users with time. Adobe has become the defacto standard for publishing, Microsoft's Excel for spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom-line.
3. 3
   Check the quality of management: How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of the company. The companies annual reports as well as newspaper/magazine articles are good places to get this information.
4. 4
   Even a great company can be overvalued. Learn to interpret financial statements and fundamental analysis to find one that the market has valued fairly, or undervalued.
   • Price to earnings ratios should be below 20. If the P/E ratio is over 20, then the company could be overpriced for it's earnings. Benjamin Graham popularized this indicator after the great depression.
   • Buy a Price-to-book below 2. The price-to-book ratio is the price of the company divided by the total value of its assets. A low ratio shows that the company's stock is cheap.
   
   

Tips

• Start thinking about everyday companies you come across with this new framework.
• Visit the company’s website and financial websites online that give you varied insights on the stock like Wikinvest.com and Morningstar
• Learn the basics of reading financial statements. Then, check to see how profitable the companies you're interested in are. Check their debt position. See if they have been growing steadily.

Warnings

• Never jump into buying stocks in a company unless you've sat down and done your research.
• Stay away from stock tips -- they are merely someone's grandiose theory about getting rich quick or a salesman that is paid to inflate a stock so that the company can raise money by dumping stock on unsuspecting investors.
• Warren Buffet says that it amuses him how high IQ CEO's mindlesly immitate one another. Warren says that he NEVER gets good ideas listening to others.
• While you should invest in companies you know, do not limit yourself to just one or two sectors. Try to research about companies in a variety of sectors and diversify your stock portfolio.

Related wikiHows

• How to Interpret Financial Ratio

Sources and Citations

• http://news.morningstar.com/classroom2/course.asp?docId=80345&page=1&CN=COM
• http://www.independent-stock-investing.com/Famous-Stock-Market-Investors.html

http://www.wikihow.com/Find-Great-Companies-to-Invest-In

Evaluating Company Quality

To buy a good stock, you only need to know if the company is a good-quality company and if the price you have to pay for its stock is reasonable.

A good-quality company is one whose growth, upon which you rely to increase the value of your investment, is strong and stable, and one in which management's efficeincy will enable it to continue that satisfactory growth. 

The first assessment of a company's quality is the analysis of its sales and earnings growth.

As a company passes through its life cycle, its success and its potential as an investment can be sized up at a glance.

Companies that are good candidates are easy to spot.

More important, companies that are not good candidates are even easier to spot.

As you become more experienced, you'll be able to gain more insight into what is in store for a company and why.

What makes a company valuable and what makes a stock a "Buy"?