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Nine Proven Steps to Sharemarket Success

The Nine Proven Steps to Sharemarket Success is a system for assessing the future performance of companies based on key criteria.

Developed by a former colleague, it’s the product of his formal qualifications as a financial analyst and over twenty years of experience as a consultant and financial journalist. His career, included work with such top financial media organisations as The Financial Times of London, Reuters News Service and The National Business Review.

His experience gave him some insight into how companies work and interact with other sectors of society. Understanding factors such as investor psychology (greed and fear) and what makes people and organisations ‘tick’ plays a large part in his system..

Nine Proven Steps

  1. Market Dominance

    Research indicates that companies that rank first or second in their sector by revenue are traditionally the most profitable and therefore these companies are favoured by IRG.
  2. Balance sheet strength

    Industrial companies must have shareholders' funds that are equal to 50% of total assets, ensuring they have the resources to meet obligations in the event of market or economic downturn. The threshold for finance companies is 8% and for utilities or other companies with high levels of operating cash flows from dependable sources it is 30%.
  3. Positive operating cash flows

    Rather than focus on reported profits, which often contain non-cash items, IRG looks for companies with strong cash surpluses from sales after all input costs have been paid. A company needs to demonstrate positive operating cash flows in at least four out of every five years to qualify.
  4. Strong cash flows relative to dividend payment

    Cash surpluses need to be 50% greater than total dividend payments during a 12 month period to create a 'margin of safety' that should allow dividends to continue to paid even in the event of a downturn in performance.
  5. Rising trend of earnings growth

    An indicator of management strength in a company is its ability to consistently deliver earnings growth despite variable conditions. A company that achieves such growth in three out of every four years has a higher probability of continuing this trend than other companies.
  6. Low debt levels

    Companies with minimal long-term debt have a superior ability to survive and prosper during adverse operating conditions. IRG's debt indicator requires companies to be able to pay off all long-term debt from net operating profit within two years.
  7. High levels of retained earnings

    If a company retains earnings, and is able to reinvest those earnings to get an attractive rate of return then its future earnings, and share price, will appreciate. This will deliver tax-free capital gains to investors over time. Companies that pay out high levels of dividends show less growth and investors are disadvantaged because they have to pay income tax on dividends. Therefore, IRG looks for growth companies who pay out less than 50% of net profits as dividends. The reverse applies for yield companies, where a higher percentage of payout is acceptable
  8. Inflation-proof pricing

    Companies with market dominance and excellent products and services are able to lift their prices to match or exceed inflation. IRG looks for companies with gross operating margins that rise at a rate greater than inflation in two out of every three years.
  9. Superior return on equity

    Investment success requires achieving a high level of return on capital invested. Therefore, IRG favours companies that have produced an average return on shareholders' funds over 5 - 10 years of 15% or greater.

Not surprisingly though, few companies, no matter how large and apparently successful, meet all criteria. Those who do however, have a greater than average chance of consistent future growth.


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