Pankaj Murarka on 4 things to look for before investing in smallcap stocks

economictimes.indiatimes.com:

Pankaj Murarka, Founder, Renaissance Investment, says “good companies, even if they are small, tend to have a long track record of paying good or healthy dividends to shareholders, which effectively shows that the company is shareholder-friendly.”Which are the top four-five points that you look into a smallcap before investing. As a thumb rule, which five areas that the company or the financials of the company should justify before you enter?Essentially, the first thing I would advise investors to look at is look at the balance sheet of the company. you want a company which does not have significant leverage or debt on its balance sheet; you want a company with a strong balance sheet.

Every five years, say there will be some crisis locally or globally and these companies need to survive the economic crisis. Since they are small, they tend to be more vulnerable as compared to large companies. A lot of small companies failed during the Covid crisis.

So the first and foremost thing is to buy a company with rock solid balance sheets with very low leverage or moderate leverage. Secondly, try to have some understanding of the business of the company in terms of its growth prospects. For example, if you walk into a departmental store, you like some product which is manufactured by a smallcap company.

For example, let us say I had some investor who bought some cakes, which were made by Bector’s Foods. It was a smallcap consumer company. He went and bought Bector Foods after seeing the balance sheet of the company.