Monitoring portfolio companies’ business performance is an indispensable part of a robust stock portfolio tracking approach. Just like your favorite sports teams, you want your portfolio companies to continuously progress. Only you won’t be monitoring your favorite teams’ points and goals on ESPN but key performance financial indicators as part of your stock portfolio tracking routine.
History has shown that stocks are the most powerful vector for value creation. But, value creation for you as shareholder greatly depends on your portfolio companies’ growth in revenue, income and profitability. So stock portfolio tracking 101 stipulates that you closely monitor your portfolio companies’ relevant financial indicators.
Keeping on top of your portfolio companies’ performance metrics, such as revenue growth, profitability, market share, or customer acquisition cost provides a good picture of their business trajectory. Investors who evaluate this data through stock portfolio tracking are in a position to make informed long-term investing decisions. They will know the best time to sell or buy, or when to hold on to a stock.
How monitoring business performance in stock portfolio tracking works
When implementing a robust, long-term investing strategy, you want to start tracking a portfolio company’s business performance from the day you become a shareholder in the company. From that day on, you are one of the company’s owners. Your expectation is that the company will create value for you and the rest of its shareholders by progressing over time. This progress is measured by a set of key business performance indicators (KPI), some of which can be specific to certain industries.
Just like professional investors, you will want to track how your portfolio companies’ business KPI evolve compared to when you first bought stocks in them. You can do this by writing down its profitability level, growth rate or financial situation at the time of the purchase in a spreadsheet. The best portfolio trackers will actually provide you with a feature to help you track your portfolio companies’ KPI through time against their value when you first bought the stock.
The most important indicators to watch
While there many different aspects of a company’s business performance, the most important ones clearly are growth and profitability. The following provides a brief overview of the most important growth and profitability measures that an investor should keep an eye on as part of his or her stock portfolio tracking routine.
Key growth rate to monitor in a stock portfolio tracking routine
Growth is arguably the most important driver of valuation creation for any type of company. Several growth rates are particularly important to track as part of your stock portfolio tracking routine throughout your long-term investing journey.
Revenue growth rate is one of the most crucial indicators of how a company performs in particular market. It lets investors evaluate whether the company’s underlying market is a growth market, how the company does versus its competitors and whether the top line accelerates or decelerates. In analyzing a company’s growth rate quarter after quarter through their investment tracker, investors do well by factoring market cycles that are specific to a company’s industry into their analysis.
A company’s net profit growth rate reflects the trajectory of company’s profit growth. But just looking at profit growth is not sufficient. Investor must put bottom line growth into perspective with topline growth and even intermediate lines in the profit and loss statements, such as EBITDA or EBIT.
It is important to understand whether profit grows faster or slower than revenue and what drives the divergence. For dividend investors, sustainable income growth provides the strongest support for continuous dividend payouts.
Cash flow growth is a crucial indicator of a company’s financial health for several reasons. First and foremost, it demonstrates a company’s ability to generate more cash than it spends, which is essential for sustaining operations, investing in growth opportunities, and returning value to shareholders.
A positive and growing cash flow indicates that a business is efficiently managing its working capital and is potentially less reliant on external financing. This financial stability allows for more flexibility in strategic decision-making, such as pursuing acquisitions or expanding operations. Additionally, consistent cash flow growth can make a company more attractive to investors and lenders, as it suggests a lower risk of insolvency.
Finally, in the long term, a company with strong cash flow growth is typically better positioned to weather economic downturns, as it has the liquidity to manage through challenging periods.
In certain industries, customer growth rate is a vital measure of a company’s performance and future potential for several reasons. Firstly, it directly reflects the market’s response to a company’s products or services, indicating whether the business is successfully attracting new customers.
A growing customer base often leads to increased revenues. Strong customer growth can signal market expansion or the successful capture of market share from competitors. It’s also a proxy for brand strength and market relevance, suggesting that the company is resonating well with its target audience.
Moreover, in businesses where network effects are significant, such as in the tech industry, each new customer adds value not only in terms of direct revenue but also by enhancing the value of the service for other users.
Principal corporate profitability measures in stock portfolio tracking
Measuring corporate profitability is crucial for investors as it directly impacts the potential return on their investments as shareholders. Profitable companies are more likely see an appreciation in their stock value and pay dividends to investors.
Profitability is a key indicator of a company’s financial health and sustainability, suggesting its ability to grow, invest in new opportunities, and withstand economic downturns. It points to effective management and operational efficiency, which are essential for a firm’s long-term success. Therefore, tracking portfolio companies’ profitability through your preferred investment tracker will empower you to make informed decisions about the viability and attractiveness of your holdings. These are some of the most important profitability measures to monitor through your portfolio tracker.
Sound stock portfolio tracking must comprise the monitoring of net margin. Surveilling a portfolio company’s net margin is essential for investors as it provides a clear picture of how efficiently a company is converting its revenues into profits. An elevated net margin indicates operational efficiency and effective cost management. It signals the company’s ability to generate profit from its sales, a key factor in assessing its financial health and long-term viability. Moreover, consistently strong net margins can be evidence of competitive advantage, suggesting that the company has pricing power or a unique value proposition. This lever can be a catalyst for a company’s potential to deliver returns for shareholders.
Tracking your stock portfolio holdings’ cash flow margin through an investment tracker is vital for investors as it measures the efficiency with which a company converts sales into cash. Cashflow margin reflects a company’s ability to fund operations, invest in growth, and meet its financial obligations without relying heavily on external financing. A healthy cash flow margin suggests that the company is not only profitable but also proficient in managing its working capital. Finally, strong cash flow margins can generally be viewed as a sign of financial strength.
Businesses with strong cash flows are better equipped to invest in opportunities as they arise. For investors, this provides reassurance about the company’s capacity to sustain and grow its operations.
Return on assets (ROA)
Return on assets is another must-have business performance indicator for your stock portfolio tracking. A company’s ROA reflects how effectively your portfolio companies are using their assets to generate profits. A high ROA demonstrates efficient management and utilization of the company’s resources. In essence, ROA provides valuable insight into how well the management is deploying the company’s capital in productive investments, which in turn impacts the overall value and profitability of the business for the long term.
A robust ROA can also signify a competitive advantage. Therefore long-term investors often use ROA as a key criterion in determining the attractiveness of a company as an investment opportunity.
Risk management in stock portfolio trackingng tools
Monitoring business performance helps a great deal in identifying potential red flags in such a company’s fortunes, such as declining sales, increasing debt levels, or customer churn. Early identification of these issues allows for timely intervention, for example by replacing a stock whose fundamentals are on the decline with a better alternative.
The best stock portfolio tracking apps in the market make it particularly easy for investors to track business performance indicators by showing both the current value of a given KPI and its value at the time of the purchase of the company’s stock. If the KPI has improved, the stock portfolio tracking app shows the current value in green color. If it has deteriorated, it will display the figure in red color. Through this color-coding investors can find weak spots in their portfolios in a single glance. This is a simple, but very powerful feature in an investment tracker.
Trend Analysis in Stock Portfolio Tracking
Regular analysis of business performance through your stock portfolio tracking routine helps in identifying trends, both positive and negative. Spotting a trend early can be the key to capitalizing on opportunities or mitigating risks. For example, if you see that a company consistently improves all or almost all of its KPI, it may be worthwhile considering adding to the position, assuming you don’t already have a large exposure to it.
Inversely, your stock portfolio tracking apps may show that a company’s business KPI are mostly red, i.e. they have deteriorated relative to the level at the time of the purchase of the stock. In such a scenario, you may want to consider selling some or all of the position in question.
Monitoring portfolio companies’ business KPI – An indispensable part of stock portfolio tracking
Economic history shows that stocks are a great vector for building wealth throughout your long-term investing journey, driven by value creation by innovative and well-managed companies. This statement generally holds true, as long as these companies continue to evolve and progress through time. This is where a good stock portfolio tracking app comes into play. It provides for a convenient way to monitor the progression of your portfolio companies’ business performance over time.