The Equity Checklist

There are 2 ways in which you can invest in stocks, Direct Equity & Mutual Funds. Mutual funds have been the retail investor’s favored investment for a variety of reasons, with mutual funds accounting for the great bulk of money in employer-sponsored retirement plans. Direct Equity has been known to create long term wealth.

Mutual Funds have been providing a diversified portfolio with transparency & investor fairness as they are guided by laws. A diverse portfolio includes securities with differing capitalizations and industries, as well as bonds with varying maturities and issuers to reduce risk. A Mutual Fund might provide faster diversification at a lower cost than individual shares. They are extremely liquid investments with easy access to investors. The cost of buying a diver mutual fund is lower than building a diversified portfolio via Direct Equity.

Investing in Direct Equity also has its advantages. Profits from capital gains are substantially higher in equity investments than in other types of investments. The shares rise in value as the market strengthens. Shares are also liquid and transferrable. Diversifying in direct equity also provides an advantage rather than investing in one company. Dividends from companies are also a component of Return on Investment.

The primary goal of any investment is to improve the value of the capital invested. Wealth growth is a crucial impetus for investment, which in turn grows the investor’s money over time. Your investing strategy should guarantee that your portfolio matches your risk tolerance, investment objectives, and time horizon.

Looking at the above, I felt equity and mutual funds are better investments for me as I have a long time horizon (very young), high risk tolerance as well (can handle some amount of loss in order to learn) and my investment objective to grow my wealth.

With this, I decided to start my Research Journey with Direct Equity & Mutual Funds by making a checklist to help me decide on where to invest and what to avoid.

PS. Wait for my next post for the Checklist.

As promised, I am going to share my checklist below.

Well, I have made 7 sections of the checklist out of which I am sharing the 1st section of my checklist in this post. It’s The Basic Checklist when you start to analyse a Stock. This checklist is more suitable for Mid-Caps/Small-Caps/Micro-Caps as Large-Caps are already a safe bet fundamentally.

A basic understanding is required of the Sector that the Stock belongs to. If you have an understanding of how revenue is generated and how companies operate in this sector, it helps you better understand their financials. It is also important to understand if the raw materials for this sector are easily available & if it can replace imports.

The basic analysis of the stock starts with its P/E, EPS, P/B & Book Value. I did not quantify a benchmark for these ratios but preferred that EPS & Book Value grew in the last 10 years and P/E is not very high.

The next focus was on the Promoter Holding. It is better if the Promoter Holding would be above 50% and that there is no pledging in the same. A check is also required on if there is any Foreign Promoter Holding. If FII’s or DII’s have a significant holding in the stock, it is a good sign.

Next would be the Financial Statements. Starting with the Profit & Loss Statement of last 10 years, the focus here should be on the Revenue, Operating Profit, EBITDA Margin, Net Profit, Net Profit Margin, EPS & their Trends over the last 10 years. Interest Cost/Depreciation should be focused on in expenses and their trends. Interest Cost should be focused on as it also shows the trend of Borrowings. If the company gives Dividends, what is the payout ratio and its trend since the last 10 years is also important.

In Balance Sheet, the main focus should be on Borrowings, Reserves, Fixed Assets and Investments and their Trends. In Cash flow, CFO is the most important as that will tell you if the main business is cash positive or not. Trends of all 3 cash flows (CFO, CFI, CFF) is important to check.

There are certain ratios which are important to check like ROA, ROE, ROCE, D/E, Interest Coverage Ratio & Cash Conversion Cycle.

  • Sector the company is present in?
  • How much holding the promoter has in the company?
  • How much of the promoter holding is pledged?
  • What is the 5 year Revenue CAGR?
  • What is the 5 year Net Profit CAGR?
  • How much has the Interest Cost Increased/Decreased in the last 5 years?
  • What is the Dividend Yeild? Is the Trend Increasing?
  • How much Debt has Increased/Decreased in the last 5 years?
  • How has the Trend changed in Debt/Equity Ratio?
  • How has the Trend Changed in ROE/ROCE?
  • Have the Cash from Operations been positive in the last 10 years?
  • Is the company been generating Free Cash Flow in the last 10 years?
  • Has the company been able to maintain a low Cash Conversion Cycle?
  • Is the product such which can replace imports?
  • Is it difficult to get Raw Material for the said Products?

Ps. Wait for the next post on “The Management Checklist.”

Hi…if possible, while elaborating each checklist, if you could give 1 or 2 live company examples, it would be easy to co-relate. Like in case of basic checklist, if you select 2 companies of ur choice, and elaborate on all the parametres pertaining to those specific companies, understanding would improve.

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I will share soon!!!

The Management Checklist

Now, if you feel that a lot of the points on your “Basic Checklist” are being ticked off and you feel satisfied, you should move on to the next part of the Scrutiny which is “The Management Checklist”.

This is a very necessary part as this identifies and decides whether the people running the company are Trustworthy and Truthful.

The first check should be whether the Board of Directors (BOD) running the company is Family Based or Professional Based. Professional Based Management would include Independent Directors from Various Fields. In the case of Midcaps/Small caps/Micro-caps, most companies will have a Family Based Management as the companies are small. Still it would be better to check on the same. This would also include reading on the Education/Qualification/Experience of each and every member on the Top Level Management (TLM)/BOD team and if it is relevant to the business they are running. It would also be helpful to check for any recent Management Interviews that would be available on YouTube to see if you get a sense of comfort while listening to them.

It’s mandatory to check for any Black Dots on the company or any of the members of the BOD/TLM. This can be done by just a Google Search. All you need to do it add the words SEBI/Fraud/Criminal Activities to their names. You can also check discussion of general public on Valupickr which would help in getting a better understand of the company as well (part of your Basic Checklist).

A check on their shareholding pattern is also necessary. Have any huge stake sales been made recently by the Promoters/Directors/FIIs/DIIs. Stake Sales would be negative for the company and Stake Buys would be positive. They could also be drawing a high amount of salary from the company. This also needs to be checked via the Annual Report.

A track record should be kept if the TLM/BOD are giving out any future specific data in conference calls/management interviews and if that is being followed or not in the future conference calls or management interview being held. This would help in understanding the Integrity of the TLM/BOD. This would help in getting a Better Sense of Comfort.

The Management Checklist in Short:

· What is the kind of Management? Family or Professional?
· Have there been any recent Stake Sales by Promoters/FIIs/DIIs?
· Are there High No. of Associates/Joint Ventures?
· Have the Company or Promoters or Directors been associated with any frauds or criminal activities?
· Does the Management/Promoters draw a high % of salary from the company?
· Are Qualifications/Experience of Promoters/Directors relevant to the Company they are running?

Once you feel like you can Trust the Management to run the Company with Integrity, the next part of the Checklist would be “The Valuation”.


The Valuation Checklist (Qualitative)

Now that you Trust the Management to run the company successfully (The Management Checklist) and the also are fairly confident with How the Company is Performing (The Basic Checklist), it’s time for you to look at the Valuations of the Company.
What do I exactly mean by Valuation of the Company? In the stock market, Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. The importance of valuing stocks evolves from the fact that the intrinsic value of a stock may be different from its current price. By knowing a stock’s intrinsic value, an investor may determine whether the stock is over- or undervalued at its current market price. Now this is actually a perceived value which might be different from investor to investor. Investor A might find buying a stock at Rs. 100 to be Cheap (Valued Low) and another Investor B might find it to be Expensive (Highly-Valued). This means that the intrinsic value (perceived value) for Investor A is higher than Rs.100 and would end up buying the stock. For Investor B, the intrinsic value (perceived value) is lower than Rs. 100, so would end up not buying the stock or wait for the price to correct and then buy the stock.

How would you determine the intrinsic valuation? The following Qualitative Factors could help as given below:

· Net Worth of the company: It is an important metric to gauge a company’s health, providing a useful snapshot of its current financial position.

· Average Sales/Profit Growth of the company over the last 10 years: Sales/Profit Growth of the company helps in understanding how much the company can grow in the future.

· Economic Moat: A company with a defensible economic moat is better able to compete with new market participants, while companies with large user bases benefit from network effects. A company with a relative cost advantage is likely to be more profitable, and companies in industries with high switching costs can more easily retain customers. High-quality companies often have intangible assets (e.g., patents, regulations, and brand recognition) with considerable value.

Quantitative Metrics can also help in Valuation of the company.

The Valuation Checklist (Quantitative)

This could be done in Quantitative terms by looking at the following ratios. The first thing to look at would be the P/E of the company. The lower the ratio, the better it is. Same goes for the P/B ratio. If you get a sense of comfort looking at the two ratios as it’s not too high, then you can consider buying the stock. Looking at their trend over the years is also necessary.

A look at the Enterprise Value would also be a good idea in comparison to the Market Capitalization. The ratio of EV/EBITDA would also be of help. The low the ratio, the better.

All of these ratios should be looked at in relative comparison to older years of the company and also to their peers. This helps to identify if a “Fundamentally Sound Co.” is available at the better “Valuation” than the company you’re looking at in the same sector. (Ps. You need to run the Older Checklists on other companies too)

These should help you take a decision on how much % of the overall portfolio should be given to this particular company. I would start with a very small position of your overall portfolio and increasing/reducing the size based on Quarterly Results, Price Performance (a little technical analysis is also required, Techno-Fund Investing) & Management Commentary.

The Valuation Checklist (Quantitative) in Short

· Are you comfortable with the current P/E & P/B of the company?

· Are Competitor’s P/E & P/B similar to that of your company’s?

· Has the Company Performing Better than Nifty/Sector Index price-wise?

· What kind of Position Sizing would you be comfortable with for this Company?
But wait, this just not the Time to Go Ahead and Make the Investment. You still have 4 more Checklists to look at before you Buy the Stock. And the next one is an Important One which will help you Avoid getting Trapped into a Company which is involved in “The Financial Shenanigans”.

The Financial Shenanigans Checklist

Financial shenanigans are actions designed to misrepresent the true financial performance or financial position of a company or entity. Financial shenanigans can range from relatively minor infractions involving merely a loose interpretation of accounting rules to outright fraud perpetuated over many years. Keeping a check on these is very important while deciding if you should buy the stock or not. If you’re able to answer the below questions and none of the answers raise a red flag in your mind, then the company is safe to be invested in.

ü Has the Company made too many Acquisitions which are Expensive?

ü Is there too much Goodwill on the books that seems unjustified?

ü Has the Company been borrowing continuously? Where are these borrowings being used?

ü Have the Receivables of the Company been continuously increasing and Sales aren’t increasing at the same rate?

ü Has the inventory of the company been continuously increasing but Sales aren’t increasing at the same rate?

ü Have the margins been consistent or have they been fluctuating continuously?

ü If the Net Profit of the company is increasing, is the CFO increasing along with it?

ü Are there many Related Party Transactions for Purchase/Sales/Loans?

ü Have there been many Extraordinary/Exceptional Items in the last 5 years?

ü Is the company Capitalizing R&D & Interest Costs or is it taking them as Expenses?

ü What is the opinion of the Auditors?

ü Have Auditors been changed recently?

ü Is the Company making enough Disclosures?

ü Are you able to understand their business from their Investor Presentations/Annual Reports/Management Interviews?

ü Is enough information being provided?

ü Have there been any sudden exits from the Top Management/Board of Directors?

ü Is the company increasing Dividend by Increasing Debt?

ü Is the Promoter connected politically?

ü Are the promoters being investigated by any Government Agency? (It’s a big risk if yes)

ü Are there any accidents/fire incidents/lockout/protest by labourers happening regularly at their Factory Premises? (If it’s a Manufacturing Concern)

ü Is there a large amount of Other Income in the company’s financials?

ü Are you feeling comfortable when you hear the management on a conference call?

(For further information please refer The Management Checklist )

ü Do you feel that the management is boasting too much and won’t be able to achieve what they are saying?
(For further information please refer The Management Checklist )

If you get a satisfied answer to all the above questions, then the stock is safe to be invest in. But there is still one more step left before you decide to invest in the stock: The Industry Analysis.


Are you referring ro any particular source for these checklist? Or its your own observations?

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No this is a self generated checklist. Prepared it along with my team.


The Industry Analysis

Now that you know the company is safe to invest in, a check on the industry it operates in is necessary. Start by answering the questions listed below.

ü Which sector is the company present in? Do you understand the sector and how it works? Is it a scalable segment or a niche segment?

ü Does it require High Working Capital?

ü Is it easy for New Companies to enter this kind of a business?

ü Are the other companies in the same sector growing or not as compared to the company you are planning to invest in in the last 5-10 years? Find reasons if you find a contradictory answer.

ü Is there a threat of Substitute Products?

ü Is it a market leader in the industry? If not, why choose this company and not the market leader?

ü Is it a capital intensive or labour intensive industry?

ü Is it a pollution generative sector? Carbon Footprint is increasing or decreasing?

ü Is it a commodity based sector? Is it affected by the weather?

ü Is the sector currently in Headwinds/Tailwinds?

ü Is the sector Government Regulated? Is it involved in imports/exports? (If yes, the government will be regulating policies which needs to be checked time and again)

ü Is it a sector where technology is continuously changing? If yes, how frequently? (This means that they would need to keep changing also continuously which would require high amount of Capex)

ü Are there any other specific industry-based risk factors which are not mentioned above?

ü Is the industry favoured by market and giving a high P/E multiple?

It is always better to list down all the risk factors that might affect an industry/sector which will help you keep track of the macros of the specific industry.

Once you are convinced that this is a good stock to invest in, go ahead and plan your buying. But still you need to make a few decisions before you final put in a Buy Trade. Wait for my post on The Buying/Selling Decision.

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Demagnetize this type of Stocks!!!

Following is the Kind of Stocks that you should Avoid:

ü Leading Stocks from a Leading Sector in a Bull Run.

ü Cheap stocks at a Later Stage of a Bull Run.

ü Small Microcaps with Untested Business Models.

ü Stock making New Lows Continuously.

ü Market Capitalization Huge in comparison to Other Players in Industry.

ü Companies carrying out Unrelated Diversification through Acquisitions (Inorganic Growth)

ü Companies continuously increasing Debt/Equity.

ü Companies in Cyclical Sectors.


Kindly elaborate on why large market capitalisation is a turn off? Mostly market leaders of an established sector will always have large market cap like TCS or HUL or Nestle, Pidilite

This checklist has been made taking into perspective specifically for Mid-Caps/Small-Caps/Micro-Caps as Large-Caps are already a safe bet fundamentally.

I have already mentioned this in my second post.

As for what I meant in that point is for e.g. a sector has companies that have a market cap of 1000-5000 crs, a company in the same sector with a 10000/15000 cr. market cap should be checked thoroughly fundamentally before investing or can be avoided as well.

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The Buy Decision

Finally, we are at our final checklist of our Investment Decision that is the “Buy Decision”.

Foremost, you need to be convinced with all the other checklists that you have already ticked off and you are in a comfortable position to start your Investment Journey in the following stock. You need to decide at which price you would like to enter the stock. I do take help of technical analysis to help me make that decision (Techno-Funda Analysis). But it isn’t always necessary to use it. Consider these questions before making a Buy Trade:

ü Are you willing to buy more if it goes down by 10%?

ü Are you willing to buy more if it goes up by 10%?

If it’s a yes in both the questions, then you are definitely ready to start investing the in the stock. (You are convinced with the stock and its ability to grow in the long term).

One you are done making the Buy Trade, answer these below questions:

ü Are you willing to sell if it goes down by 10%?

ü Are you willing to sell if it goes up by 10%?

If it’s a yes in both questions, this means that you are still not convinced enough to start long term investment in the stock. The position is still a trading position for you. If it’s a trading position for you, then you should definitely keep a stop loss. (Sizing of these positions should be such that you should be able to sleep well at night).

Here you can definitely start by building smaller positions of your overall portfolio and as & when your conviction for the stock increases/decreases, you should increase or reduce the sizing of the position.

With this, I come to the end of my Checklist. Hope this helps an Investor perform better in the Markets!!! Happy Investing!!!


It was a very good thread. A know nothing investor, if reads your checklist, he will definately get a very good start and good foundation for Investment.
Now after selecting the stocks by following your different checklist, now the time has come to start tracking their fundamentals at regular intervals.
So if possible, kindly elaborate on how to track the portfolio stocks at definite intervals and what tools to be used for that.


Thankyou for your kind words @Mudit.Kushalvardhan. Will Update soon on that. Thankyou for giving me a topic.

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Please share with other novice investors as well.


Where to find data for below questions

  • Is the product such which can replace imports?
  • Is it difficult to get Raw Material for the said Products?
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Both of these are very qualitative questions which would require to either find it by a Google search (based on the sector/product) or some kind of hint might be available in the AR.

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