Post by Equity Section on Jul 3, 2012 18:33:03 GMT 5.5
Equity Section Check-List
Most of the renowned investors use a check-list before getting invested into any company. If any company doesn't stand as per the expectations on any of the check-list criteria, they simply ignore that business. Here, Equity Section is also trying to form an initial check-list and will keep on adding and improving wth passing time.
Business
1.Understanding of business: Understanding of a business to be invested is very necessary to understand the dynamics affecting the business.
2.Consistent operating history: One must be sure of the consistent operating history of the business.
3.Money required to maintain current operations: Less the money, the better it is.
4.Pricing power: The pricing power is absolutely necessary for any business to fight inflation. Pricing power also tells about the command the company has over its customers.
5.Reading about competitors: Reading about competition tells you things which one might have missed about the business dynamics, especially weak competitors.
6.Special skill or talent: A business reliant on a specific person or specific set of skills suffers if the person leaves suddenly. One must invest in abusiness which even a fool can run.
7.Scaleability: Investment in any business must be made with respect to the scaleability of the business in future.
8.Entry barriers: Entry barriers can mean to be a lot of things, like regulatory approvals, high cost of business set-up, brand/moat, pricing power etc. An investor must look for entry-barriers before investing in any business so that too many competition doesn't creep in and commoditise the business.
9.Cyclicity: People must avoid cyclical businesses in favour of businesses with consistent sales.
10.Skill Sensitivity: The business must not be human skill-sensitive and reliant on a few people's aptitude. Once they leavy for greener pastures, the business can face big trouble.
Finance
1. Low Debt: Low debt is the first most criteria in any business.
2.Low Fixed Assets: There's a general preference for businesses not spending too much on fixed assets.
3.Decent Margins: Any company having decent margins is always an attractive investment. Respectable margins shows that the business is having brand recognition or pricing power.
4.High ROCE: High Return on Capital Employed makes any business an excellent investment bet.
5.Low Cash Conversion Cycle: Businesses with low CCC are able to do business with suppliers' money. They're least capital intensive and attractive bets as investment.
6.Warrants: Proper investigation into issuance of warrants must be done. In general cases, any company engaging in such tactics must be ignored.
7.Stock Options: Again, a careful ivestigation must be made into these manoeuvres. They can dilute anybody's holdings.
8.Pledged Shares: Reasons must be looked into. Again, this is a warning bell.
9.Sufficient Cash & Bank Balalnces: There must be sufficient cash available at all times with the company which can help a company mitigate sudden disturbances of any kind and which can give it a standing in bad times. The money must be its own & not from raised debt or any other manoeuvres.
Management
1.Integrity: Integrity of management is necessary for investment purposes, since its the men who run the business and if they turn corrupt, it'll be bad for business.
2.Intelligence: Intelligence of the management regarding their business environment and their understanding of it is very crucial in maing investment decisions. Integrity will always be more important than intelligence.
3.Candidness with shareholders: The forthcoming of management to their shareholders regarding their problems can indicate towards management integrity and intelligence.
4.Stock Options: The reliance of the management in awarding its employees or higher exceutive management through issuing of stock options might not be healthy for investment purposes. First of all, stock options might not be judicious to an employee's performance as the value of stock varies over a time-period. Second, stock options, when exercised, dilutes shareholders' investments value. Third, stock options are an additional expense to the company, which is not shown on the P&L statement of the company.
5.Dividend pay-out: Substantial didvidend pay-out by companies denotes that management is inclined towards wealth-sharing and throws light on the integrity of the management.
Valuation
1.Margin of safety: One shall rather look for downside protection rather than upward movement. Margin of safety is more important. Upward movement will eventually happen if your business selection is good.