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Evaluate well to make right investments

The investment of individuals is linked to the way in which companies behave and hence looking at this part carefully assumes great importance. Arnav Pandya tells more.

business Updated: Jul 28, 2008 21:01 IST

The tough times in the economy along with the rising energy prices have slowly started to impact the way in which economic activities are undertaken.

Changing individual behavior to meet the position is one part of the action, but at the same time there is also a need to ensure that as an investor one is able to keep an eye on the trends coming in from companies. The investment of individuals is linked to the way in which companies behave and hence looking at this part carefully assumes great importance.

Proposed investments
One of the first areas that are affected when things get tough is that of proposed investments. During a growing period, most companies lines up expansion and additional investment plans to make the best use of the booming conditions. A couple of things happen when things get a little tough.

In times of high inflation, interest rates rise and this can make expansion plans slightly costly for the company because they have to pay a higher rate for the same amount of borrowings. If the financial position of the company is not very strong, then they often decide to postpone the investment till things improve. The other point is that when there is such a situation, growth slows and this can have a major impact on demand. As demand falls, the company might deem it fit to postpone the additional investment plan rather than have extra demand that puts pressure on various resources.

Evaluation of position
Evaluation of the position is vital for an investor. If a company postpones its expansion plans, its future growth gets reduced. Depending upon the amount that this will contribute, the projection for the company’s financial performance will have to be lowered and this can impact the share price of the entity. This is the direct impact of such a delay and the impact can also be seen in the form of lower additional revenue from other sources.

On the other hand, there actually might be some long-term benefits if the company has stopped undertaking a project that would have over extended itself and reduced its profits margins. It could also be that the company has realised the investment was very risky and opted out of it in time.

Check on share prices
Ultimately the investor has to watch the share price of the company for their returns and this is affected by various factors. There might be some short-term impact because of the drop of the expansion plans but only by looking at the other factors will one be able to determine whether the step was in the right direction or whether there is a major hit that will be taken by the company.