The single most important piece of information an investor can know about a company they want to buy stock in is it’s profitability. Not necessarily the accounting number, but the actual profitability. A company might show a loss on it’s income statement. But if adding back in depreciation, amortization and special charges it’s a positive number, it’s still a profitable company. A company will often minimize their reported profit to reduce their income taxes. However, if a company can’t even do that at least some of the time, they will go out of business eventually.
This seems obvious. If the bills can’t be paid eventually bankruptcy looms. Yet people invest all the time in companies that have no profits, little prospects for profits, and little cash on hand. There was an article in Barron’s a couple of weeks ago that underlined this problem. Many unprofitable internet companies will be totally out of money over the next year. How they can keep going is a serious question.
When researching a stock, this is a question that must be answered. Maybe now it’s an unprofitable development stage biotech, or website company. There is nothing wrong with investing in them, but before someone does, they should answer the question, where and when will the profits come? They can only sell stock and borrow money for so long before the well runs dry.