Many investors may be tempted to buy cheap UK shares after the recent stock market crash. While they can produce high returns in the long run as the stock market recovers, a number of companies may face challenging outlooks. Therefore, it may be prudent to ascertain their financial strength and long-term growth potential before buying them.
Likewise, ensuring you have sufficient capital available in case of an emergency before purchasing undervalued FTSE 100 and FTSE 250 shares could be a shrewd move. It may enable you to fully benefit from a likely turnaround from current low prices levels across the stock market.
Financial strength of UK shares
Assessing the financial strength of UK shares before you buy them may reduce your risks and improve your returns. Some companies with weak balance sheets that contain a large amount of debt have survived in recent years due to a growing economy. But they may be among the businesses most at risk of folding in the coming months.
The world economy is set to experience one of its most challenging periods in living memory, as well as a rapid pace of change. This could cause some companies that lack the financial means to change their business models come under severe pressure.
Therefore, ensure any UK shares you purchase have modest debt and access to sufficient liquidity for investment purposes. This could be a simple, yet effective, means of improving your portfolio’s long-term prospects.
Emergency cash position
Just as assessing the financial position of UK shares is important before buying them, so too is ensuring you have sufficient cash available should you require it for an emergency. At present, unemployment is on the rise, and wage growth could be somewhat limited if business performance fails to improve.
Therefore, although cash offers paltry returns at present, having enough capital available to pay for unexpected events could be a sound move. It may mean you don’t need to sell long-term investments at unfavourable prices. This will provide the opportunity for your portfolio to benefit from a likely recovery in the coming years, without being used to fund your day-to-day expenses should cash be required.
Another simple step to take before buying UK shares is to consider whether they have the right business model in place within a post-coronavirus economy. It appears as though technology is likely to play a larger part in our lives, with many people likely to work more from home. Similarly, environmental factors seem to be becoming increasingly prevalent across a growing number of industries.
Assessing the business model of any company is subjective. But at least considering the adaptability of a stock before buying it may help you to avoid companies with obvious limitations. This could enhance your ISA’s performance, and boost your long-term financial outlook.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.