Key factors to evaluate when considering investing in a company

Overview

Investing in a company involves assessing how the business creates value, how resilient its advantages are, and how risks are priced. This guide outlines common factors investors examine when evaluating a business, from market dynamics to governance.

A general framework

A simple framework helps compare companies. Look at the business model, the market opportunity, financial health, leadership, and risk factors. Use a consistent checklist to avoid overlooking important details.

Key factors to evaluate

Business model and market

• Clarity of the value proposition: what problem is solved and for whom?
• Market size and growth: total addressable market (TAM) and serviceable available market (SAM); potential for expansion.
• Competitive advantage: barriers to entry, defensibility, differentiators.
• Revenue model and pricing: recurring vs. one-time revenue, pricing power, customer mix.
• Customer acquisition and retention: cost of acquisition (CAC), lifetime value (LTV), churn.
• Scalability: ability to grow revenue without linear cost increases.

Financial health and metrics

• Revenue growth and margins: gross margin, operating margin, profitability trajectory.
• Cash flow and liquidity: free cash flow, runway if the company is burning cash.
• Capital structure: debt levels, interest coverage, dilution risk from future financing.
• Working capital management: days sales outstanding, inventory, payables.
• For startups: key metrics like ARR, CAC payback period, LTV:CAC ratio, unit economics.

Management and governance

• Track record and incentives: past performance, alignment of management incentives with long-term value.
• Governance and independence: board composition, audit quality, risk oversight.
• Transparency and disclosures: quality of financial reporting, material risk disclosures.

Valuation and risk

• Valuation context: how the price or value reflects growth prospects and risk.
• Key risk factors: competitive threat, regulatory changes, supply chain, customer concentration.
• Scenario thinking: best-case, base-case, and downside cases to understand potential outcomes.

Due diligence checklist

• Public or private financial statements, recent earnings calls or annual reports.
• Customer concentration and major contracts.
• Revenue recognition policies and backlog (if applicable).
• IP, patents, and product roadmaps.
• Regulatory, legal, and litigation exposure.
• Management incentives, equity structure, and capital plan.
• Regulatory environment and macro risks.

Conclusion

Evaluating a company for investment is about assembling a clear picture of value creation, resilience, and risk. Use a structured checklist, compare with peers, and be mindful of biases. Remember this is general information and not personalized investment advice.