The 4Ms You Need To Check Before Investing In A Company

Did you know that there are more than 900 companies listed in Malaysia’s Stock Exchange? 

Singapore too has close to 800 listed companies on the Singapore Exchange.

With so many companies listed, how is it even possible to filter out your next successful investing opportunity?

Enter the 4M methodology. I have used the 4M method to quickly screen out companies that are worth my time to study deeper. 

Check it out in the video!

Transcript:

Hi everyone! Joo Parn here from Kaya Plus!

So today I will be sharing with you all a favourite metric of mine, which I personally use, where I screen out companies that are worth putting effort and time to further study. What is it you are talking about? Well, this is a method I call the 4M analysis. Basically, we are going to look into 4 criteria, 4 Ms and from here, it will determine whether the company is worth my time to actually study further or no. Are you ready? Let’s Go!

Moat

So the 1st M we’re gonna talk about would be the economic Moat of a company. So a moat is basically a man-made lake surrounding a castle, and the bigger the moat, it makes it harder for enemies to actually attack the castle. So in a real-life situation, we’re looking for companies that hold a superior advantage over its competitors This advantage can be so big, that competitors would find it very difficult to actually challenge or to disrupt the business of the company

Management

Now the 2nd M we’re gonna look at is the Management of a company. Now you might ask me, why is it so important to look at the management? Picture this scenario: If you’re flying on a plane and something bad happens to the pilot and the co-pilot at the same time. Would that be a scary situation to be in? Now the same goes for a listed company. A listed company needs to have qualified and well capable management team to actually handle the operations and the activities of a company. Only then, the management team can lead the company to scale greater heights and achieve higher performance, in the end, benefiting the shareholders of the company

Margins

The 3rd M is one of my favourite metrics. It is the profit Margin of a company. So a profit margin analysis actually compares two companies by highlighting which company is actually producing a higher profit. And as investors like you and me, we will definitely choose to invest in companies with a higher margin or a higher profit. Because at the end of the day, these profits could be eventually translated into a higher share price or a higher dividend payout.

Money

Last but not least, is the 4th M, which is Money! Now a profitable company would eventually bring in more and more money into its bank account. This would be the most interesting time to see how the management team utilize the cash generated from the company’s businesses. Will the cash be actually used to grow the company bigger, or will a portion of it be paid out as dividends to investors like you and me? Ultimately, it depends on which business model the company is actually in, and on what is the size of the company? A small company would eventually require the cash to grow its businesses bigger and bigger, while big and matured companies might be more generous when it comes to paying out more dividends based on the cash generated from their businesses. So it’s really up to investors to look into how the management team actually utilize the cash generated from the business to actually gauge and to make a decision on whether cash is well spent or invested into growing a company’s growth and the shareholder’s interests.

So I hope you really enjoy the 4M methodology that I am sharing with you today. Personally, I used it a lot because it helps me identify companies which have good economic Moat, and are being managed well by a group of talented Management team. Now ultimately, it does ensure that the company has a higher profit Margin and that will eventually mean that more and more Money is flowing into the company’s bank account. So eventually, a combination of these 4 M would mean that a company is actually a good investment opportunity for investors to look at

So I hope you really put the 4 M methodology into good use in finding your next investment idea Till we meet again, see you soon! I’m Joo Parn from Kaya Plus, bye-bye!

P.S. So if it has a good 4M and a high RoE? Does it make it a sure-win to invest company? Check out the dangers of high RoE here!

DISCLAIMER
The information available in this article/report/analysis is for sharing and education purposes only. This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned; nor can it be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. If you need specific investment advice, please consult the relevant professional investment advice and/or for study or research only.
No warranty is made with respect to the accuracy, adequacy, reliability, suitability, applicability, or completeness of the information contained. The author disclaims any reward or responsibility for any gains or losses arising from direct and indirect use & application of any contents of the article/report/written material



2 comments

  1. Siti N

    As a newbie on stock investing, I must admit, I’m still kinda lost with the jargons. I know jargon for REITs but for regular stocks, it’s a bit challenging. So back to your 4M, which parameters/equations do you to to analyse?
    1. Moat: The nature of the business? Like single large biz/monopoly? Or they received a lot of international accolades like DBS Bank and SATS/Changi Airport?
    2. Management: How do you quantify a management performance?
    3. profit Margin: This one is clear cut.
    4. Money: I guess this one refers to the company’s plan for future expansion?

    1. JP

      Hi Siti,

      As a newbie, you are doing well based on the feedback you have given!
      1. Every company we see is business. Some businesses are just more profitable or advantageous. Like why McDonald’s has more people queueing up compared to Pizza Hut in Malaysia. Or how a large business can drive smaller players out by engaging in a price war.
      2. Inside every Annual Report of a company, the Management will always review their past performance and give an outlook on the future development of the company. Sometimes, by reading past annual reports and looking at the current situation of the company, can give us some insight of the management. Are they walking the talk, or are they just giving empty promises?
      3. I’m glad that one is clear cut
      4. Yes. It all depends on where the company is going in the future. Small companies tend to keep cash and reinvest, while big companies will pay out more dividends with the cash generated from their businesses

      You are doing well! Glad to hear some feedback and see improvements in your progress

      JP

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