Excellent question, but I do not think I have any ready answer for that. Moreover this is not an exhaustive checklist but the purpose was to remind me to check certain crucial things. As Charlie Munger says âInvert always invertâ so let me reverse your question as I think itâs easier to explain situations in which I will not invest. To buy or not to buy depends on lot of factors and a positive on few items not necessary means itâs a buy and vice-versa. Buy decision is quite subjective and depends on lot of moving parts. Let me give you a few example of stock where I have decided not to invest for various reasons. (Not implying that these stock will not be wealth creator but they do not clear the criteria I have set)
Lumax auto (PE 4.5x, PB 1.2x):
1). No moat at all. 2) No leadership position in any of the products and no great value addition products. 3) Company manufacturers Chasis, exhaust system, parking brake etc. 4) Debt free company but very low market cap.
_Bharat Gears _
- Not a leader in its segment. 2) Exposed more to tractors - which I do not think can grow much or limited by availability of credit to farmers. 3) Volatile financial history 4) Incurred losses during 2001-04 5) debt equity ratio of 1x 6) Net profit margin improved from 1.5% in 2009 4% in 2012. But still far less.
Weizmann Forex (did not invest on corporate governance issues. Networth of the company is 60crs, so below numbers are material)
1). Receivables overdue for six months â 5.4crs. (AR 2012) â As per demerger doc âThe company being in the retail business has large number of customers and the business being highly competitive there is always a need to extend credit to the valuable customers.â
2). 30crs invested in Windwill in 2011â This is despite the fact that only during the same year group segregated and demerged its power business into Karma Energy Limited. I do not understand the logic of setting up a windmill under Weizmann.
3). Corporate guarantees issued on behalf of group company and JV (JV total liabilities is less than a cr, so major part must be for group company) â23 crs.
Narmada Gelatine: Story is based on ASP increase and volume lead growth not possible. I am unable to visualise whether company will remain profitable after five years. Historical performance very volatile.
1). Commodity nature of business. Lot of competition from unorganised players.
2). Quality of supreme furniture much better than Cello.
3). During 2000-07, their sales were flat and their net profit declined from 11 to 2crs. As per my friend the main reason was competition from unorganised group.
4). Unbranded playersâ market share is still more than organised players in moulded furniture. Unorganised player has advantage as they evade excise duty, use lower quality plastics and are able to sell at cheaper price.
5). Their fortune appears to improved in last few years only because of Cello bubble Guard product. Reliance on one product is dangerous.
6). ROCE of Nilkamal never crossed 20% in the last decade and mostly around 10% during 2001-07. There does not appear to be any moat in this business. Even for Wimplast ROCE during 2002-08 was between 5-10% and its not clear to me how long the current improvement in the business can last.
PS: I thought examples are the best way to answer your question, feel free to suggest any other alternative