Before buying shares in an Australian company, check that the investment fits your timeframe and tolerance for loss, understand how the business makes money, read its latest financial reports and ASX announcements, and assess its cash flow, debt, audit report and risks. These checks can help you make a more informed decision; they cannot guarantee a return or establish that a share is right for you.
Start with your timeframe, risk tolerance and diversification
Decide how long you can leave the money invested and how much loss you could tolerate before assessing a particular company. ASIC advises matching investments to your circumstances: “Before undertaking any investment, you need a clear idea of your investing time frame (short versus long term) and risk tolerance (low or high) and what products are aligned to that.”
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Consider whether buying one company would leave too much of your investment exposed to a single business. ASIC notes that diversification applies both across asset classes and within them. Diversification can reduce the impact of one investment falling, but does not eliminate the risk of loss. There is no universally suitable allocation for every investor.
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Explain how it earns and spends money
Put the company’s business in plain language: what it sells, who pays for it, what drives its costs, what might interrupt its operations and how it funds growth. If you cannot explain how the business generates revenue or what could undermine it, the available information may not yet be enough to support a decision.
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Read reports and announcements from primary sources
Start with the company’s latest annual report and its most recent interim or half-year report. Read the directors’ report, financial statements, notes and auditor’s report, then check subsequent ASX announcements for developments published after the report date. ASIC explains that listed entities lodge financial reports with ASX and that relevant disclosing entities have continuous disclosure obligations. A prior report may not reflect a significant later change.
Use the issuer’s investor-relations pages and ASX disclosure information to locate documents, and check that you have the latest versions. Company registration or compliance with reporting requirements does not establish that its business is viable or financially sound.
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If the company is raising capital
If shares are being offered under a prospectus, read that offer document and check it through ASIC’s OFFERlist as appropriate. A prospectus relates to an offer; it is not a substitute for the ongoing reports and announcements used to assess an already-listed company. ASIC’s investment guidance also recommends reading a prospectus or product disclosure statement (PDS) when one is provided.
Read the financial statements for earnings, cash and debt
Income statement: are profits consistent?
Look across several reporting periods rather than treating one year’s result as a trend. ASIC suggests asking: “Is the company consistently profitable or does it swing between profits and losses every few years?” If results have changed sharply, read the company’s explanation and consider whether the cause appears recurring or temporary; do not assume past profit will continue.
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Cash-flow statement: does the business produce cash?
Accounting profit and cash generated by operations are different measures. ASIC proposes asking: “Do the company’s operations generate surplus cash each year?” Compare operating cash with spending needed to maintain equipment and fund expansion. Large investment spending can be part of a growth plan, but understand how it is funded and what the company says it expects to achieve.
Balance sheet: how much borrowing supports operations?
ASIC’s prompt is: “How heavily does the company borrow to support its operations?” Consider borrowing relative to assets, then read the notes for repayment dates, restrictions and other terms that affect the picture. A borrowing-to-assets comparison is a starting question, not a pass/fail rule: the available guidance does not set a universal safe debt threshold.
Notes and reports: understand the context
Read the notes for the basis of preparation and explanations behind headline figures. Check the directors’ report for the company’s account of operations and risks, and review the auditor’s report for any qualification or emphasis. A qualified or adverse opinion calls for careful explanation; an unqualified opinion does not remove business, valuation or market risk.
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An audit provides an independent opinion about whether the financial report applies the relevant reporting framework and is free of material misstatement. It is not a prediction of performance. ASIC states: “ASIC’s role is as company regulator. It is not ASIC’s role however, to ensure the financial soundness of an entity.”
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Check what has changed since the last report
After reading the latest annual or interim report, review later results announcements, investor presentations and other ASX disclosures. Look for information that changes the picture of earnings, cash needs, borrowing, operations or funding. ASIC describes continuous disclosure obligations for disclosing entities, including disclosure of information that could affect a share price or investor decisions, and notes that these entities lodge half-year as well as full-year financial reports. Reporting obligations do not mean that every new development makes an investment attractive.
Verify advice and question persuasive claims
If someone is advising you, check their details on ASIC’s Financial Advisers Register and establish whether they are authorised to provide the relevant advice. ASIC says licensing provides safeguards, but does not guarantee against financial loss.
Treat claims of guaranteed or unusually high returns, exclusive access, unsolicited offers and pressure to act quickly as reasons to pause and investigate. Understand what you are buying and the risks involved before proceeding. ASIC’s Moneysmart shares guide is a general consumer resource for learning about shares.
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Before deciding, write a short explanation in your own words. It should identify what the company does, what could weaken earnings or cash flow, how debt and funding affect it, what the latest disclosures changed, why the current price seems reasonable to you and what evidence would invalidate your view. These are decision prompts, not a formula for predicting returns. If you cannot answer them from current disclosures, that is a reason to do more work or not proceed.
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