This is a brief look at how to use SWOT to evaluate investments.
SWOT is the acronym for Strengths, Weaknesses, Opportunities and Threats. SWOT was developed by Albert Humphrey in the 60's, and today, the concept of SWOT analysis has become an industry standard for evaluating investments and in business management. In this article, we will zero down to the use of SWOT analysis as a tool of investment evaluation.
SWOT analysis involves the evaluation of internal factors (the strengths and weaknesses), and external factors such as the opportunities and threats to an investment, to determine ultimately if a venture is worth going into.
SWOT analysis can be used as a business planning tool or an investment tool. As an investment tool, it will give the investor insight as to the current state of an investment and the future outlook of that investment. By comparing the information about what an investment opportunity looks like at the moment, to what it is expected to be in the future, a good or bad investment immediately becomes obvious. Let us look at how to use SWOT analysis to evaluate investments.
The “S” Component: Strengths
Let us assume that you are looking to invest in the stock of a particular company. Companies are listed in sectors on the stock market, so there will be competitors. You may be looking for a company that can outperform its competitors and hence deliver favorable returns on investment. In another scenario, there will be periods when the entire forex market is down, and you are looking to see a great opportunity out of the ashes. The S component of SWOT can provide an answer. A company’s strength will try to show how and why the company presents an investment opportunity. Take the case of technology stock Apple, or the case of Google vs Yahoo!. Apple has outperformed its competitors such as Microsoft on a consistent basis. Google has also done same and Yahoo! is playing catch-up. What has distinguished Apple and Google as a firm strength is innovation. Both companies have been able to devise new products that appeal to the market place on a consistent basis, driving up revenues and share prices and delivering returns on investment for investors. Ability to come up with products that solve needs and make life easier is a strength that has set these companies apart. For some other companies, it may be diversification or being able to control operational cost. Look for something that could qualify as strength that a company would have that could give it a competitive edge to outperform others in the market.
The “W” Component: Weakness
What are those things that could mitigate against good returns in an investment? For a company, is it uncontrolled costs that erode on profit margins? Is it a difficult operating environment? Excessive taxation? Or is the company saddled with claims and lawsuits? These are some of the weaknesses that could render a company vulnerable and reduce the returns on investment.
The “O” Component: Opportunity
Many investments that eventually turn out well depend heavily on identifying opportunity. Most people cannot see opportunity because it is not so obvious. For example, a company called Flour Mills PLC in Nigeria, decided to diversify investment from its natural flour milling business and into cement production, animal feed production and other ventures. It withheld dividend payments in 2006 and 2007 to fund this venture. Many disgruntled investors dumped the stock of the company, but when the global financial crisis hit and sent the stock exchange into a radical nose-dive, this company was one of those that survived, increasing its share price from 20 cents a share in Q3 2008 to 60 cents per share by year end 2009. Those who saw the opportunity profited. Those who didn’t lost out big.
The “T” Component: Threats
A good example of a threat to a profitable investment is issues bordering on taxation and regulation. A government regulation can radically decide the future of an investment in an instant.
Understanding SWOT analysis and knowing how to apply them can make the difference between a good investment and a bad one.
Introducing the next generation of online trading platforms – eToro Openbook. Openbook offers traders a social forex trading platform where they can view online trading activity, locate the top traders and imitate their trades. Sign up today and get started!