When a company starts declining, there is not much growth potential left, unless a miracle happens. The returns on the existing plan also start to reduce until the entire business is shut down. As an investor, you should see the future of the companies in advance based on their management. You should be continuously monitoring the growth of the company that you invest in. The moment you realise that the company is declining and there is no hope for further growth, you should take out your investments.
No matter how loyal you are to your invested company, if your goal was to make money from your investment, you will have to make better decisions. It becomes difficult for declining companies to reward their shareholders. When the investors have thousands of options to choose from in the market, it is senseless to stick to a declining share.
With the three signals mentioned below, you will be able to study your company’s condition and make better decisions.
If a company’s revenue has been declining in the past few years, it is a sign for investors to take our their money. Revenue of a company is their best income statement, and if their top line statement is not showing any progress, then it is time to switch the investment. Not only a declining revenue, but a flat revenue is also a sign of caution for the investors. The company can only increase its profit if they are generating more revenue. The flat and declining revenues is a sign of poor management and a weak operation. Also, if you find out that the revenue of the competitive company is growing at the same time, then your company will not be able to hold for long.
Negative Profit Margin
Profit margin is net profits/net sales. It is realised for a time frame that determines how much a percentage of sales has turned into profits. If the profit margin for a company is gone negative, it shows that the company is unable to make regular profits from its business. Most of the time, the companies lose their market share to their competitors and so make lesser profits. It is a sign that investors should be able to see in advance to take out their investments before it is too late.
Big Dividend payouts
Dividend payouts determine the ratio between the total amount of dividends paid to shareholders and the net income of the company. You can calculate this by dividing the dividend per share by earnings per share of the company in a year. If a company has a constant dividend, it is a healthy sign for the investors. The problem arises when the company starts paying more of its net income as dividends. This means that the company is not retaining enough income, and the investors should back out at this moment.