Stock market

I will top up my ISA cheaply by finding these 3 things!

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A stocks and shares ISA can be a good earner in the long term. Then again, I can put more money in than I get out. How well I do depends on the investment choices I make.

Just finding great businesses isn’t enough. I need to find a great investment. They are not necessarily the same thing.

Here are three things I consider when looking for great investments at bargain prices that I can add to my ISA.

1. Is this a good business model?

My first question for a business is how large is its potential customer market and what does it have that can differentiate it in that market.

Rolls Royce operates in a market where aircraft engines sell for millions of pounds. So, although there is likely to be a limited number of customers, the market is valuable and poised to remain so. Both its proprietary technology and established customer base are a competitive advantage for Rolls.

Conversely, one of the concerns I have about my conduct Boho Its competitive advantage seems to have shrunk. Its results, published today (May 8), showed shrinking sales and a big loss. Boho indeed!

A strong competitive advantage, in contrast, should give a company pricing power even when sales revenue declines.

2. Do the finances look strong?

But earnings don’t tell the whole story.

A common mistake people make when starting to invest is to ignore company accounts. But it’s important to understand how a company is valued. Net debt (basically, debt minus assets) on a company’s balance sheet can turn an otherwise attractive business into a non-investment for me. Aston Martin A case in point.

Debt isn’t always a bad thing for a business, but it affects value.

Vodafone The price-to-earnings (P/E) ratio is seven. On its own, this might sound like a bargain for my ISA. But it also has net debt of around £31bn.

Earnings matter when valuing a company – but so does its balance sheet.

3. Is the assessment attractive?

As it happens, I also own Vodafone in my ISA. I think there are risks (all companies do), but I like the value of the company relative to its business prospects.

The opposite is true. Intuitive surgical (NASDAQ: ISRG).

His business model sounds fantastic. It manufactures, sells and provides services for robots that help perform medical surgeries. The medical market is huge and flexible. Customers are often not price sensitive.

Because some surgery tools need to be replaced after each procedure, Intuitive continues to have a service revenue stream on top of product sales.

Plus, the more machines it has in use, the more intuitive it can generate best-practice guidelines based on real-world data. This helps make his presentation even more compelling.

As for its balance sheet, Intuitive ended its most recently reported quarter with $7.3bn in cash, cash equivalents, and investments.

However, it has a market capitalization of $138bn and a P/E ratio of 70. It doesn’t matter to me the security if the business suffers, from a cyber-attack to an AI-powered competitor taking over its market share.

For my ISA, I want to buy big companies – but at the right price!


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