The Equity Checklist

  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 weath...

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 Sa...

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 par...

  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 I...

  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 wo...