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How to Evaluate a company with losses

Most investors will take a close look at the financial statements of the company and the recent reports.

Some key questions--

1. Are losses increasing or decreasing?

2. When does company expect to become profitable?

3. Do you believe their sales pitch? Do they have a good product or service idea that is likely to make it in time?

4. Are the losses due to one time start-up expenses or to soft charges like depreciation of equipment?

5. How much cash do they have? What is the burn rate? How long will the cash last at current rate of loss?

6. If losses are eating into shareholder's equity, how long can that equity last at current loss rates?

These are the basics. If its a new start-up, and they are just getting production going, you should have a clear idea of when they will become profitable. Merely keep them on schedule.

If its an old line company suffering during the recession from losses due to declining sales, have they made their necessary cut backs? What is their competitive position? Is this a business likely to recover? Or one that is being displaced by new technology or off shore competitors?

etc etc

One size does not fit all. The questions must be adapted to the industry and its specific characteristics, but you get the idea.

Accountants often use measures like cash flow and EBIDA to measure the prospects of start ups, but those methods are beyond my paygrade. Perhaps others can elaborate.

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