Ask Our Experts: Questions Before Investment
Q: What should I know before investing in a hemp company?
By New Frontier Data
A: As a general rule, the Hemp Business Journal and New Frontier Data do not provide investment advice about specific companies. However, there are several best practices that investors, regardless of the industry, would be well-served to follow.
Before investing in a company, look at its earnings growth. Has it climbed over time, even by small increments? Regular growth is typically a positive indicator, though it should not be treated as the sole consideration for whether to invest. It is also important to look at the company’s stock. Is its stock price stable, or does it go through periods of wild growth followed by a precipitous decline? Generally, it is advisable to back companies with a stable stock price rather than a volatile one.
The composition of the company’s management team is another essential piece of the investment puzzle. Research the company’s leaders and investigate their track records. Do they have histories of running successful companies, or have they lurched from one failed venture to another? In the world of business, failure can happen to anyone, but someone with track record for failure may be indicating a pattern for financial ruin.
Perhaps the most critical aspect to examine before making an investment is the company’s debt-equity ratio. Almost every company has some form of debt, but a prudent investor will want to ascertain whether the company in question maintains a manageable level of debt.
To determine a company’s debt-equity ratio, examine its balance sheet and divide its total liabilities by shareholder equity. There are some online tools available for the mathematically disinclined. While there is debate about what constitutes a good debt-equity ratio, most investors agree that it should not be over 2, which means that the company derives two-thirds of its capital financing from debt, with one-third from shareholder equity.
There are many other ways to evaluate the quality of a company. However, so long as one has a clear understanding of the company’s earnings, stock volatility, management team, and debt-equity ratio, they should establish an informed basis for whether to invest.