Qualitative Parameters
- Do I understand the business
- Details of technology collaboration, if any
- What is the revenue model – how does business make money. What is segment wise revenue contribution and how it is supposed to change going forward.
- Output is a necessity or a choice Can other industry/business challenge this industry/business (is there a product substitute). If yes, which and to what extent
- What are distribution channels (marketing infrastructure)
- Is the business replicable/scalable/good franchise business
- What is Demand – Supply gap in the industry and sustainability of its gap
- How does business look like a decade down the line? Would it be existing and be more valuable
- What is the moat/competitive advantage/niche/differentiation of company and sustainability of these characteristics
- What is downside /Risks in the business/company/industry
- Does the company has output pricing freedom/ability and sustainability of this pricing power
- Are inputs available without interruption? Pricing power of company on inputs and sustainability of this pricing power
- What is the quality of management – able, honest and with good integrity
- What is promoter’s stake? What are insiders doing (buying/selling by promoters and top mgmt.). Any pledge of shares by promoters. Any buy back by the company in last three years.
- Any major observation from corporate governance report
- Present shareholding pattern. Changes in SH pattern over last 5 yrs. List of top 10 shareholders (with % shareholding).
- Can a fool/idiot run this business (Business is simple, output is a necessity and competition is not tough)
- Strengths of company
- Weaknesses of company and how company is handling them
- Opportunities to company and how company is tapping them
- Threats to company and how company is handling them
Quantitative Parameters
- Equity History and important points
- Has the revenues been growing consistently. Do we have visibility of revenues going forward
- Whether business has stable and growing profitability
- Whether business has low leverage
- Whether company has stable and growing return track record (ROE> 15% and ROCE > 15% continuously over last 5 years)
- Whether company has stable and growing min. 5 years dividend track record
- Whether company has good cash flows (positive operating cash flows and positive free cash flows continuously over last 5 years).
- Any important/notable auditors’ qualification
- Any important observation from notes to accounts. Any change in the accounting policy with impact on P/L and B/S.
- What are company’s capex plans in near future and how does co. propose to finance that. Incremental capital – equity and/or debt planned?
- Is the company financially disciplined? Am I buying this business for quality of assets, earnings and cash flows?
Valuation Parameters
- What is Valuation/intrinsic value of the business? How confident I am on valuation
- Is business cheap relative to itself, peers and market on various valuation parameters (Price, P/E, P/BV, Price/Sales etc.) over a period of time (Last 5 years)
- What justifies Margin of Safety (MOS). Business is available at what discount to its intrinsic value
- Reasons of market mispricing and likelihood of correction.
