We have faced this dilemma umpteen times, whether to invest in a loss-making company or not. There is no straightforward answer to it. There are a number of factors we need to consider before coming to a decision.
It is for sure, not easy to ignore a business that we find pretty exciting. But, its financials don’t look as good. The business is burning cash. And, we don’t see any sign of profitability.
If that happens then, most businesses won’t survive for long. But, there are always turnaround stories. And, no one wishes to miss them.
Should you invest in a loss-making company?
Before coming to a conclusion, just by looking at the financials. We should do our own research on how the company will fare in future. A company’s financials can tell us how it has performed in the past.
But, nothing about the future. You must have heard:
“Past performance is not indicative of future results”
So, it works both ways. A company with sound financials may not perform as per expectations. The same can be said for a loss-making company.
Assess the company you intend to invest in on various parameters. How the revenue growth, income(loss) from operations, net income, etc. have fared in the past. Listen to what management says about the demand for their product and services. Has it translated into financials in the past?
Apart from that, a company may not do well on financials. But, when we read between the lines, it shows that it is investing heavily to expand its operations. And, when it reaches full capacity, it would do good.
Or, a company accumulates debt for the same reason. Despite doing well on the operations front, it has to pay its lenders. The profits are diverted to pay back the debt.
There could be numerous reasons. We can’t just consider a couple of factors to decide the future trajectory of a company.
One has to understand the business well overall and see where there is an issue. Most of the information we can get through the company’s financials/earning report and management commentary. Once we have found out why the company isn’t performing well on financial parameters. It is time to check if the company is moving in the right direction to improve those parameters.
In conclusion, every business is different. Analyze why it is running in losses. Once you have identified the issues, look at how the company is trying to turn things around.
Important: This material is provided only for information purposes only. It doesn’t constitute investment advice. We shouldn’t be held liable for the investment decisions readers take. We encourage readers to act at their discretion.
