Donald,
Coming to the points put up as a checklist for looking at a company
Business Quality)-- This should be relatively easy. We should be able to ascertain whether quality of business is great or not.
1). Is the business suitable for long term investing? Is there ample opportunity for the company to grow its business at a smart pace over the next 3-5 years?
2). Does the business entail excessive capex? And does the capex generate sufficiently high returns to justify efforts to expand?
3). Is there any possibility of govt interference creating problems with the prospects of the business?
4). Is the business sensitivie to raw material price volatilityâis the business such that price hikes can be passed easily?
5). What kind of business are we looking at? Is it a sunrise sector(agri, water and waste water management, cloud computing, biotech etc), or a steady growth sector(consumer, fmcg) or a neglected sector(capital goods, infra space)? Many a times it happens that todayâs sunrise or a steady business is tomorrowâs neglected business.
6). How are the majority of companies in the sector doing? If most of them are doing well then it should be a good business to invest in.
**Management Quality **)-- Here there are a lot of subjective opinions possible. Essential questions one asks are
1). What kind of promoter holding is there? Any excessive pledging?
2). How have the management handled the companyâs growth in past few years. Whether they have taken unnecessary risks/debts etc. Whether any bets taken by them in the past have paid off or failed?
3). Does the management have the hunger to grow?
4). How are the shareholders been rewarded? Dividend payment and high dividend payout ratio is a very big plus for investing in small cap companies bcos that assures me that the profits reported are for real.
5). Some usual antics of managementsâwhether they allot themselves convertible warrants and donât convert?? Whether they sell their holding at opportune times in open markets? Whether they are likely to take the minority investors for a ride with the cash in the bag?
6). Management remuneration? Whether it is justifiable?
7). How do they answer investor queries at AGMs or other interaction platforms? Whether they walk the talk? Whether they promise less and deliver more? Or the other way?
FUNDAMENTALS: We at valuepickr seem to be good at this.
1). Starts with the growth or lack of it. Kind of growth shownâfast, medium, slow??
2). Whether growth if any has been achieved by resorting to too much debt or equity dilution?
3). Return ratiosâROE, ROCE etc. I dont need to elaborate on these.
4). Any chances of sudden change in fundamentals for better or worse? Is the company on the cusp of a phase of explosive growth? Or is the company at the peak earnings levels after which it is supposed to slow down/show degrowth?
5). Again dividend payout and especially increasing dividends with increasing profits.
6). Free cash generation or operating cash flows over past few years
Industry Position and Track Record
Here one asks where the company stands in the peer group. Most people want to invest in sector leaders only and believe that only these create multibaggers. I beg to differ here. There have been many instances where the sector leaders have reached such a big level that there might not be too much space to grow? Here the smaller nimble players with some kind of advantages make smart choice for investing.
And whether the company we want to invest in is growing at higher than industry average? If so what seperates it from others? Any advantages/niche?
GROWTH PROSPECTS:
This should has been covered earlier in fundamental analysis itself so does not need too much elaboration. But I would be wary of companies which keep growing their profits without significant increase in the sales figures.
VALUATIONS
I think all of the above factors may be considered in evaluating the company and then the valuation part begins? What kind of valuation am I paying for getting the business? Is there some flawed market perception which is giving me a chance to participate in companyâs growth at a very cheap entry point? What is the status of the general market mood? Is it a bear phase/bull phase or sideways market?
What kind of market cap the company has and what kind of opportunity the company has to grow a few years down the line. And while looking at market cap it is very essential to look at the Enterprise Value because only market cap is often a factor which is misguiding(. E.g Textile sector stocks)
