Sunday, 29 July 2012

5 monopolies of a company to decide its financial strength

We have already heard that when investing in stock market; invest in the shares of strong companies. We have learned that earning per share (EPS), net sales (NS), Book Value per share (BVPS) , Return on invested capital (ROIC) and Debt to Net Income ratios are the parameters which helps to analyze the financial health of a company. We can check all these of a company for the last few years, say 10 -12 years. But what is the guarantee of these parameters exist in future. No doubt this is a difficult matter. Nobody can predict the financial future of a company related with the value of shares. Equity related securities has a statutory warning that the past performance may or may not repeat in future. But here we invest our hard-earned money. Can we throw away our money in those uncertain conditions? No, we can check whether the company has any monopoly in any of the following areas. It is not easy to fail such a company with monopoly power.

Monopoly power of a company cannot be defeat with another one. So there are chances of surviving such company with more profit and good financial conditions for a long time. So let us check the important areas where a company can have monopoly power.

We have already heard that when investing in stock market; invest in the shares of strong companies. We have learned that earning per share (EPS), net sales (NS), Book Value per share (BVPS) , Return on invested capital (ROIC) and Debt to Net Income ratios are the parameters which helps to analyze the financial health of a company. We can check all these of a company for the last few years, say 10 -12 years. But what is the guarantee of these parameters exist in future. No doubt this is a difficult matter. Nobody can predict the financial future of a company related with the value of shares. Equity related securities has a statutory warning that the past performance may or may not repeat in future. But here we invest our hard-earned money. Can we throw away our money in those uncertain conditions? No, we can check whether the company has any monopoly in any of the following areas. It is not easy to fail such a company with monopoly power.

Monopoly power of a company cannot be defeat with another one. So there are chances of surviving such company with more profit and good financial conditions for a long time. So let us check the important areas where a company can have monopoly power.

Brand Name: Brand Name is one of the important monopolies of a company. You also may first think about brand name for purchasing a product. Such company can survive with good financial health for a long time. Colgate is an example of such a brand name for tooth paste.

Patent or Trade Secret: Patent or Trade Secret is a monopoly for certain products and when we think about such a product, some particular companies will come into our mind as first priority. Fried Chickens of KFC is an example for such a product. That crispy fried chicken is their own specialty. Coca Cola is another example for trade secret which is not yet revealed. These Trade secret or patent rights hold them high for a long time and nobody can beat it in near future or ever.

Exclusive right in any area: This is another monopoly condition of a company. Nobody is there to compete them in a particular area of consumption. If anybody uses such facility these companies could make money. Indian railway is the best example for such a monopoly condition. If anybody travels by train in India, Indian Railway makes money. Google is another example for search engine where 95% of internet users are using for searching on the internet. Nobody can beat them in a near future.

Unable to switch over: Some product or service could no switch over to another one. It is not worthy to switch over to another product or service. “Microsoft windows” is the best example for such a product. There is no another operating system to substitute with it.

Low price: This is another monopoly condition of a company. A company can sell a product in lowest price which another company cannot. If this is applicable to any product, nobody can beat them for the product for a long time.

If any company has any of the abovementioned monopoly power, that company can be strong financial future for a long period. One can invest in the shares of such company if all the 5 financial parameters are strong and long existing.

Monopoly areas for Financial Strength of a Company


Related Posts

How to invest in stocks

Stock Market Ideas for beginners 

1 comment :