2023 ready: Here are my non-negotiables for investing in ASX shares next year

Who ever said having high standards was toxic must have never invested a dime…

| More on:
Woman in pink shirt ticks checklist with red checkmarks

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Next year could be a curly one for ASX shares as the global economy navigates the possibility of a recession. That's why I think it is critical to have a game plan for your portfolio heading into 2023.

Having set criteria for your investments can help prevent impulse purchases. At the same time, it clarifies your acceptable standard for portfolio entry. As the saying goes, "You can't hit a target you cannot see, and you cannot see a target you do not have."

The importance of an investment checklist — or non-negotiables as I like to call them — is even greater during challenging economic times. Without it, you might run the risk of adding a fragile company to your holdings.

My 'must-have' list for ASX shares in 2023

Firstly, these are the conditions I'm personally setting out for my investments in 2023. I strongly urge you to consider what is important to you and your portfolio to create your own 'non-negotiables'.

Steady up on the debt hotshot

Debt can be a beautiful thing when used effectively by a company. However, with elevated interest rates, a challenging market to raise capital in, and a possibly rocky road ahead — a boatload of debt is not something you want an ASX share to be strapped with.

Normally a debt-to-equity ratio below 40% is considered healthy. For me, I'm setting a hard limit of 25% debt on the balance sheet for 2023. Ideally, the company would also be in a net cash position.

I believe financial hardiness will be an important trait to have next year.

Hitting pause on the unprofitable ASX shares

There are plenty of exciting businesses that are pre-earnings, screaming that they'll be the next 100X investment. Yet, next year will require my investments to be profit generators.

I'm not against investing in loss-makers in general… in fact, eight out of my 27 holdings are unprofitable companies. But, it comes with added risk if the cash runs out and the company is unable to raise additional capital.

Image
Source: Brian Feroldi Twitter

In my opinion, profitable ASX shares are offering the most attractive risk-to-reward potential now. After all, it is company earnings that drive the share price in the long run, as shown above.

Ok, but can you allocate capital like a boss?

Capital allocation will make or break a company — that I am sure of. In 2023, the most important non-negotiable is a proven track record of effective use of capital by management.

Next year's potential economic landscape is what makes this a critical consideration. There will likely be opportunities for ASX-listed companies to acquire and grow. Executed well, this can add huge value to the company. Executed poorly, and we could look at another Slater and Gordon (value destruction from Quindell acquisition shown below).

TradingView Chart

Before investing in an ASX share, consider reviewing the company's past return on capital (ROC). For me, the bar is set at a minimum of 15%. Although, above 20% will be preferred.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

A mature-aged couple high-five each other as they celebrate a financial win and early retirement
Dividend Investing

5 top ASX dividend shares to buy right now

Analysts think income investors should be loading up on these shares.

Read more »

Two adults and a child look happy as they walk through airport with child sitting on suitcase.
Dividend Investing

Will Qantas shares pay a dividend in 2024?

Will the dividends return this year? Let's find out.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Dividend Investing

2 market-leading ASX dividend stocks to buy in April

Analysts have put buy ratings on these market-leaders.

Read more »

Father in the ocean with his daughters, symbolising passive income.
Dividend Investing

I'd spend $8k on these ASX 200 shares today to target a $6,102 annual passive income

I believe these ASX 200 shares will continue rewarding passive income investors for years to come.

Read more »

Man holding Australian dollar notes, symbolising dividends.
ETFs

Want the latest dividend from the Vanguard Australia Shares ETF (VAS)? Here's what you have to do

If you want to bag the latest VAS dividend, here's what you need to do.

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Dividend Investing

Investing for passive income? Keep any eye out for that boosted Telstra dividend today!

If you own Telstra shares, keep an eye out for that juicy dividend payout today.

Read more »

Couple at an airport waiting for their flight.
Cheap Shares

Is Qantas a bargain ASX 200 stock today?

Analysts at Goldman Sachs think the Flying Kangaroo could be dirt cheap.

Read more »

Person holding a blue chip.
Blue Chip Shares

2 ASX blue-chip shares I'd buy with $3,000 right now

These are large businesses with compelling futures.

Read more »