Investing for Beginners , investing Invest in a business that any idiot can run - because sooner or later, any idiot probably is going to run it.
Peter Lynch

Investing in Unprofitable Companies

Investment Strategy - Unprofitable Companies

Investing in companies that are still unprofitable is more difficult than investing in profitable companies, but may also be very successful. If the company will turn around to profits, then stocks of such company will explode in price and you will be very happy about the investment. But how to know, that these positive changes will occur? You can never be positive about it and it's a complicated investment strategy.

Usually investors are looking for signs that could signal about possible transform of the company from unprofitable to profitable: it may be a companies‘ management change to a stronger and with good recommendations, acquisition by a successful larger group, an exit of a significant competitor from the market, the positive changes in the market, a new highly successful product, the success of invention etc.

No matter how good it sounds - such success stories do not always occur and even not so often. The company may keep unprofitable with negative cash flow over a long period, and the end might be not a success story at all. Most of the times, stocks of these companies gradually vanish, while the company goes bankrupt or is acquired by larger group for a low price. Therefore, investing in unprofitable companies is very risky, and stocks of such companies shouldn’t make a substantial part of investment portfolio.

Investing in unprofitable companies is implemented according to EV/S and P/BV ratios, which can be measured even if a company or do not generates a positive net income or EBITDA.

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