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 examine earnings, cash flow, debt and audit findings. These checks can help you make a better-informed decision, but they cannot guarantee a return or establish that a share is right for you.
Start with your timeframe, risk tolerance and portfolio
ASIC recommends deciding how long you can leave the money invested and how much risk you can tolerate before choosing an investment. Its spokesperson describes the starting point this way: “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.” ASIC’s investment questions also encourage diversification. Holding different investments can reduce the impact of one falling investment, but it cannot eliminate the risk of loss.
Consider whether adding one company would leave too much of your money exposed to a single business or sector. Diversification applies within asset classes as well as across them; there is no universal allocation that is suitable for every investor.
Understand the business and find its official disclosures
Be able to explain in plain language what the company sells, who pays for it and what drives its costs. Identify what could disrupt its operations and how it expects to fund growth. If you cannot make sense of how it earns revenue or what could undermine that revenue, pause before deciding.
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Use the company’s latest annual and interim reports and subsequent ASX announcements. ASIC says listed entities lodge financial reports with ASX, and relevant disclosing entities have continuous-disclosure obligations for information that could affect a share price or investor decisions. Start with the issuer’s investor-relations pages and ASX’s company announcements, then check that you have read disclosures published after the reporting period covered by an annual report. ASIC’s company financial reports guidance explains reporting and disclosure requirements.
Company registration and filing reports do not prove that a business is viable or financially sound. If the company is making a new offer and has issued a prospectus, read that offer document and check it through ASIC’s OFFERlist where appropriate. A prospectus relates to an offer; it is not a substitute for keeping up with the company’s ongoing reports and announcements once it is listed. ASIC’s investment guidance advises readers to review a prospectus or product disclosure statement (PDS) if one is provided.
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Read the financial statements: earnings, cash, then debt
Use several reporting periods to look for direction and consistency. One year’s result may not reflect a durable trend, and a single ratio is not a pass-or-fail test. Read the company’s explanations and take its sector and accounting context into account.
Income statement: are profits consistent?
Ask whether the company is consistently profitable or swings between profits and losses. As ASIC puts it: “Is the company consistently profitable or does it swing between profits and losses every few years?” Look at the pattern across multiple periods and read the report’s discussion of what drove changes; do not assume one strong result will continue.
Cash-flow statement: does the business turn operations into cash?
Ask, “Do the company’s operations generate surplus cash each year?” Compare cash from operations with the cash the company uses to renew equipment and make other investments. Accounting profit and operating cash answer different questions: a profit on the income statement does not by itself show how much cash operations generated or how much was absorbed by investment.
Balance sheet: how much borrowing supports the business?
Start with ASIC’s question: “How heavily does the company borrow to support its operations?” Consider borrowing relative to assets, then read the notes for context such as debt maturities and restrictions. The borrowing-to-assets question is a starting point, not a universal safe threshold; whether debt is manageable depends on the business and its circumstances.
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Notes and audit report: what sits behind the headline figures?
Read the notes, directors’ report and auditor’s report alongside the statements. The notes explain accounting policies and give detail needed to interpret reported figures. Pay attention to any qualified or adverse audit opinion and understand the stated reasons. An audit report gives an independent opinion on whether the financial report applies its reporting framework and is free from material misstatement; it does not predict future performance or guarantee the company’s soundness.
ASIC states: “ASIC’s role is as company regulator. It is not ASIC’s role however, to ensure the financial soundness of an entity.” A company’s filings and an unqualified audit opinion are useful evidence about its reporting, not proof that its business, share price or future results are safe. ASIC’s guide to using financial reports describes what to look for in the statements and audit report.
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Check what has changed since the last report
An annual report only describes a reporting period and cannot include developments that happened afterward. Read later half-year results, results presentations and ASX announcements before relying on older accounts. Look for disclosures that change your understanding of the company’s earnings, cash needs, debt or funding. ASIC’s company financial reports guidance explains the reporting and continuous-disclosure obligations that apply to relevant entities.
Check advice and be wary of pressure or guaranteed returns
If someone is advising you, verify them on ASIC’s Financial Advisers Register and check that they are authorised to provide the relevant advice. Licensing provides safeguards, not a guarantee against loss.
Treat claims of unusually high or guaranteed returns, exclusive access, unsolicited offers and pressure to act quickly as reasons to stop and investigate. Make sure you understand what you are buying and the risks involved before proceeding. ASIC’s questions to ask before investing highlight checks for advice, unrealistic promises and pressure tactics.
Write down your decision before you buy
Before deciding, write a short account of the case for and against the investment. Include:
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- What could weaken its earnings or cash flow.
- How borrowing and future funding needs affect the business.
- What its newest reports or announcements changed.
- Why its current price seems reasonable to you, and what would make you reconsider.
These prompts are a way to make your reasoning explicit, not a formula for predicting returns. The decision still depends on the current disclosures, the price you would pay and your own circumstances. For general consumer information about shares, see Moneysmart’s shares guide.
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