When you do a financial budget at home, you make sure the money going out (your expenses) is less than the money coming in (your paycheck), right? Well, a business works the same way. In order to make money, a company has to ensure it has more money coming in than going out.
In this video, I talk about why it's important for a company's sales to be greater than its expenses.
What Makes a Stock Great for Investing?
Sales Over Expenses
Continuing the series on what makes a stock great for investing, the second thing to look for is sales over expenses.
When you do a financial budget at home, you make sure the money going out (your expenses) is less than the money coming in (your paycheck). Well, a business works the same way. In order to make money, a company has to ensure it has more money coming in than going out.
When looking at a company for investment purposes, you need to check their financial statements and make sure their sales are greater than their expenses (research and development, marketing, etc). If their expenses outweigh their sales and there is no growth this is a red flag for me. This shows they are spending more money on obtaining more products or research and development but they are not making sales.
A company that is good for investing will show growth in their sales. You want to see that they are doing something with the money you are investing in them.
You can access a company's financial statements by visiting their website and looking under the "Investor Relations" section. Once you have their financial statements, check that their 'Selling General and Administrative Expenses' are going down year to year compared to their sales.
During a downturn in the economy, a company whose sales are greater than its expenses has a better chance at surviving. With their expenses so much lower than their sales, they have a chance of being less affected or have the ability to cut their expenses even lower.
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