As an investor it is important to read and understand how markets work and although you may have a bias towards larger profitable dividend companies, it is still important to thing about the small companies. One book of many on the subject is called How to Become a Microcap Millionaire written by Justin Waite, published by Harriman House, Hamshire Great Britain, 2024.

Always Check the Cash

One type of business will, in general, always be riskier that the other. 1. Profit-generating and 2. Loss-making.

If a company is loss-making, you should break it down into 2 further categories are 1. revenue-generating and 2. pre-revenue.

If they are revenue-generating I analyze 6 metrics:

1. Growth – looking for double-digit revenue growth, ideally closer to 20%
2. Value – a market capitalization of less than 2 times its revenue and less than 20 times net revenue (P/E)
3. Health – ideally a company will have a little debt and net cash
4. Efficiency – gross margins to exceed 40% operating margins to exceed 10% and net margins to exceed 5%
5. Momentum – there are 3 basic states a share price can exist in 1. downtrend 2. range and 3. uptrend What you are trying to do is avoid a downtrend.
6. Potential research, research, research, companies that fulfill the 1-5 filters.

When researching loss-making companies, the most important metric to look for is cash.

The cash flow statement is broken down into 3 areas: 1. operating activities 2. investment activities and 3. finance activities.

A company is either generating cash or using it. If they are loss-making, they are using it. To be on the safe side, the author likes to make sure a loss-making company has more than 12 months’ worth of cash.

Linking to dividend paying stocks, all investors have a system and that system involves continuous learning to fit your metrics. Whether the stock is large or small in price, the idea is not to lose money and overtime ensure compound interest works for you.

There are more questions than answers, till the next time – to raising questions.