You are here:

Shares: The Aim investor's checklist

Created:
28 April 2006
Written by:
Dominic Picarda

Aim plays host to a variety of companies, from the sensible and mature to the esoteric and bizarre. Here is a checklist of six questions to ask of any Aim company, regardless of its age, strategy or sector.

Advertising

1. What's the big idea? A company should have an easy-to-understand reason for existing, whether it's a new invention, potential gold mine, new type of service or attempt to consolidate an industry. Avoid companies with a strategy that looks vague or that frequently changes. For example, Avanti Screenmedia started life selling advertising screens to shops and pubs, but chief executive David Williams is now enthusing about launching a satellite.

Also, avoid copycat companies attempting to jump on a bandwagon. Last year's float of ubet2win, for example, was an attempt to jump on the internet gambling bandwagon. And avoid those companies that are making slow progress towards their stated goals - long delays to commercialisation of a product or to an acquisition strategy can be a bad sign.

2. Do the numbers stack up? Many Aim companies are very young, and do not have much of a trading history, but it is worth having a thorough look at the accounts. Are there any sales yet and, if so, are there any profits? Do the directors, employees, customers and suppliers benefit from this business more than the shareholders do?

In the case of early-stage companies, look at how much debt there is, and ask whether the company has enough cash to see it through until it is generating cash on its own. A company that  frequently has to ask investors for more money is usually bad news. If it's already generating cash, it should be paying a dividend, or at least considering it.

3. Who's in charge? Graham Shore, managing director of small-cap stockbroker Shore Capital says that management is more important for small companies than it is for large companies. So what is the chief executive's track record like? Does he/she have experience in this industry and in running a publicly quoted company? Inventors rarely make good managers, while many professional managers have slipped up because they lacked industry knowledge. A management team should provide both elements.

Also, look at the rest of the board. There should be sufficient non-executives around to bring an overbearing chief executive back down to earth if the need arises. Finally, have a look at whether board members have been buying or selling shares. While share selling should not be taken as an automatic sign to follow suit (there are many legitimate reasons for a director selling shares), it is not a good sign if a number of directors are doing so at once.  

4. Who are the other shareholders? It's always worth taking a look at the shareholder register. The presence of large fund management companies, such as F&C or Fidelity, suggests City confidence. But be wary of companies that have a large shareholding in the hands of a single investor. This will make the shares difficult to trade, and can also create conflicts between shareholder groups.

Large founding family shareholdings are particularly bad news - Scott Tod faced an embarrassing extraordinary general meeting earlier this year when the founding family (unsuccessfully) tried to get rid of the chairman. The share price has still not recovered.

5. Who are the customers? It's important to know who will be buying the company's products or services, and what their priorities are. A company might have wonderful technology, but if customers are struggling they might decide to go without the product or service in question or go with a competitor. No matter what some companies might claim, they all have competition. For example, Aerobox has developed a lightweight, durable container for airline cargo. But, until very recently, the company struggled to convince airlines to pay more for it than they would pay for a traditional metal container.

Be wary of companies that are reliant on a single customer, too. That makes sales negotiations tricky, and can cause problems if that customer decides to stop buying. Shares in advertising agency M&C Saatchi fell last year when the company lost its key British Airways account.

6. How liquid are the shares? Liquidity - or how easy it is to buy and sell shares - is an often-neglected issue. A company may present a compelling investment case, but if it's difficult to trade the shares you may never get the chance to profit from it.

And despite the increase in the number of companies on Aim and changes to the trading system, liquidity for many Aim companies remains low. So if you're thinking of buying the shares, have a look at how regularly the shares are traded and in what volumes.

  • Back to top

Products and Services from Barclays Stockbrokers.

The UK’s No.1 Stockbroker

Stocks and Shares

Contracts for Difference

Financial Spread Trading

Gilts and Bonds

Funds Market

FX

Education Centre

Trading Simulator

Advertorial Feature

Spread your risks with spread trading

With so many big moves in the world's financial markets, there have seldom been more opportunities around for spread traders. Isn't it time you joined them?

by Dominic Picarda