Valuation and Industry Trends
Financial ratios count for less in penny stocks than in larger ones, not least because the underlying company is less likely to have earnings or tangible assets. The share price can soar on rumours but can just as quickly drop back if, as is very likely, they prove unfounded. Some investors buy profitably for the short term.

Creative accounting is more difficult under today’s reporting standards than in the past but it is still worth watching for it on the financial statements. Check that annual depreciation is not so small that it barely hits the profit & loss account. Be wary if an item that would normally be an expense in the profit & loss account is instead capitalized on the balance sheet.

Try to predict rather than follow industry trends. Takeover rumours or corporate restructuring may give a fillip to the share price.

Management
Assess the management of the companies in which you are considering investing. Look for leadership and technical expertise, which are often not combined in the same people. For example, Charles Muirhead, a 25-year-old technology genius, employed experienced management to run Orchestream, his software company that was listed on the London Stock Exchange in July 2000.

A change in management can send the share price soaring in anticipation of a positive earnings surprise. You can gain an inkling of pending staff changes by watching the company’s recruitment advertising in trade or national press.