The Equity Checklist

  Now that you have already started investing in a stock with help of the Equity Checklist , it isn’t necessary that the fundamental conviction that you have in your mind will always remain true. It may change from time to time. So it’s necessary to keep track of the stock in order to check if the conviction remains in play or not. To keep track of the stock, you would need to do the following: On a Yearly Basis: -           Read the Annual Report. (Sections like Chairman’s message, Management Discussion & Analysis, Financial Statements & their Notes will help you in understanding how the company performed around the year and what does it plan to do in the future). On a Quarterly Basis: -           All companies are mandated to release results quarterly around the year. Keeping a track of results of the stock is important. They usually provide a YOY and QOQ comparison which a...

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

  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...

  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. 

  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...