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.”