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Before buying shares in an Australian company, check whether the investment fits your timeframe and tolerance for loss, understand how the business earns and spends money, read its latest financial reports and ASX announcements, and investigate its debt, audit report and any claims made about the investment. These checks can help you make a more informed decision; they cannot guarantee a profit or prevent losses.
Start with your own timeframe and risk tolerance
Decide how long you can leave the money invested and how much loss you could tolerate before looking for a company to buy. ASIC advises investors to consider both their time horizon and risk tolerance when choosing investments. A share price can fall, and you may need to sell at a loss if you need the money sooner than expected.
Consider whether adding one company would leave too much of your investment exposed to a single business or industry. Diversification across different investments, including within an asset class, can reduce the impact of one investment falling, but it does not eliminate the risk of loss. There is no single allocation that suits every investor.
Understand the company and find its official disclosures
Be able to explain in plain language what the company sells, who pays for it, what drives its costs, what could disrupt its operations and how it funds growth. If the business model or its main risks remain unclear after reading its disclosures, that is a reason to pause rather than rely on a short summary or promotional claim.
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Start with the company’s latest annual and interim financial reports, then read its directors’ report, auditor’s report and announcements published after those reports. Listed entities lodge financial reports with the ASX, and ASIC explains that financial-report information is also sent to its register. Company registration or filing reports does not establish that a business is viable or financially sound.
If the company is making a share offer and has issued a prospectus, read that offer document and check it through ASIC’s OFFERlist and company financial reports information as appropriate. A prospectus relates to an offer; ongoing company reports and announcements are the key documents for following a listed company after the offer.
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Read the financial statements in this order
Income statement: are profits recurring?
Check whether the company has been consistently profitable or has swung between profits and losses. Read several reporting periods and the explanations for significant changes instead of assuming that one unusually strong or weak result will continue.
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Cash-flow statement: does the business generate cash?
Look at whether operations generate surplus cash and how much cash is used to maintain existing operations or invest in growth. Accounting profit and cash generated by operations are different measures, so a reported profit alone does not show whether the business is producing enough cash to fund its needs.
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Balance sheet: how much borrowing supports the business?
Review borrowing in relation to the company’s assets, then read the notes for debt maturities, restrictions and other context. Borrowing can support operations or expansion, but the amount alone is not a pass-or-fail test: the available guidance sets no universal safe debt threshold.
Notes and reports: what qualifies the figures?
Read the notes, directors’ report and basis of preparation alongside the statements. Check the auditor’s report for a qualified or adverse opinion, or matters the auditor has highlighted. An audit report gives an independent opinion about the financial report under its applicable reporting framework; it is not a forecast or guarantee of future performance. ASIC puts the limit plainly: “ASIC’s role is as company regulator. It is not ASIC’s role however, to ensure the financial soundness of an entity.”
Use trends, explanations and the company’s sector context rather than treating a single ratio as a verdict. A clean audit opinion does not remove business, valuation or market risk.
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An annual or interim report describes a period that has already ended. Read later ASX announcements, results releases and company presentations for developments that may have changed the outlook since that reporting date. ASIC says disclosing entities have continuous-disclosure obligations for information that could affect a share price or investor decisions, and lodge half-year as well as full-year financial reports.
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Pay attention to what has changed, not just to the headline result: for example, whether new information affects expected earnings, cash needs, debt or the company’s ability to execute its plans. Use the company’s own current disclosures to verify any claim about a specific issuer.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Verify advice and be cautious about investment claims
If someone is advising you, check their details on ASIC’s Financial Advisers Register and confirm they are authorised to provide the relevant advice. Licensing provides safeguards, but it does not guarantee against financial loss.
Be wary of claims of guaranteed or unusually high returns, supposed exclusive access, unsolicited offers or pressure to act immediately. Stop and investigate rather than letting urgency substitute for understanding what you would own and what risks you would take. ASIC’s general guidance also recommends reading a prospectus or product disclosure statement when one is provided.
Write down the reasons for your decision
Before deciding, see whether you can answer these questions using current company disclosures and your own circumstances:
- What does the company do, and how does it earn revenue?
- What could cause its earnings or cash flow to deteriorate?
- How do its borrowing and funding needs affect the business?
- What has changed in disclosures since the latest financial report?
- Why does the share price seem reasonable to you, and what assumptions does that view depend on?
- What new information would make you reconsider your decision?
The final questions are a way to make your reasoning explicit, not a formula for predicting returns. ASIC’s consumer guidance on shares is another starting point for understanding share investing.
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