How to Identify Companies worth Investing In: SWOT Analysis Approach

Most of us make our investments on the back professional advice of financial advisers and by following news stories broadcasted on various financial media, mainly investment news channels. But have you tried conducting research and analysis on your own?

Here are some tips that will help you in analyzing the companies that are considered as hot flicks.

SWOT is the term that every management student is quiet familiar with, but investors come from different walks of life. SWOT analysis is the term that is most commonly used in measuring a company’s current growth and its future potential.

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SWOT Analysis Approach: A Practical Way of Identifying Good Companies

SWOT is an abbreviation for ‘Strength, Weakness, Opportunity and Threat’.  SWOT can be further divided in two frames – Internal and External frame. Internal factors comprise of Strength and Weakness whereas external factors include Opportunity and Threat. Analyzing all the internal and external factors provides you with a detailed picture of current and future prospects of a company. An Investor must consider conducting Industry and Company SWOT Analysis before diving into an investment decision.

Why Internal Factors Matter in SWOT Analysis

Measuring Strength of a Business

Every company has certain strengths; if they don’t then they wouldn’t have been in market in first place. Every company has certain advantage/perk/strength over others such as goodwill, patents, IPR, location, market plan, secret formula, and support from certain niches, market share and several demographic advantages.  Before investing consider how these advantages can help in expansion of company.

Identifying Weaknesses in a Company

On the other hand if a company is lacking in some of the strengths, they are a company’s weaknesses. In a weakness analysis one must analyze how badly can the company’s weakness affect its growth potential. Mostly a company’s weaknesses are the factors that hamper growth of the company. Any Company’s weaknesses can be its competitor’s strengths, and they will definitely take advantage of it…

Most of the times a company’s strengths and weaknesses swap places in different market scenarios and should be analyzed according to your view point and several other factors, for e.g. market expansion strategy of a company is a good factor in the long run as it will strengthen company’s position in the market through mass-selling and market penetration but considering it in short run could be its weakness as the company would need to raise capital and it might make relatively less profit because of declined margins.

 

Importance of External Factors in SWOT Analysis

Eying Business Opportunities

An Opportunity is something that is beyond a company’s control. Opportunities depend upon various external factors like opening up of a new market, technological invention, and sudden increase in demand, future trends, changes of laws in favor of the company etc. World is full of opportunities but eying opportunities for a company is must in analyzing its future growth.
Examining Threats to a Business

Threats are inevitable in market but considering major threats is real important. Threats like increase in cost or raw material, reduction of price by the competitors, economic slowdown, and technological change, changes in consumer buying behavior, new regulations and trade barriers should be considered before investing.

Summing It All Together

After you have laid down the SWOT analysis details, next you need to analyze and compare the data of the different companies. You may lay them down in a matrix form to get the more appealing visual representation.

Get Into the Big Picture – Industry Analysis

One great advice is to diversify your portfolio according to your comfort levels. The initial step is to choose the right industries to choose companies from. You may analyze the right industry in a similar SWOT analysis.  Picking up the right industries will provide you with the maximum possibility to grow your investments at a faster pace. It has always been said, ‘investing in a sluggish company in a growing industry is far better than investing in a growing company of a sluggish industry.

 

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