- Must not be a loss making company.
- Must not be a PSU.
- Must be able to remain profitable for next 15-20 years to come.
- Must have zero or very low debt.
- Must not be a capital intensive business.
- Its Product and services must have competitive advantages i.e. 10x better than its competitors.
- It must be very difficult to copy its business by any other company.
- Value migration must not be happening or to going be happened in its business in next 10-15 years.
- Technological or habitual disruption factor should not be there.
- Customer loyalty must be there in the products/services offered by the firm (by force or choice )
- Entry Barrier must be there in the business so that other companies can't take over its business or take its future business opportunities.
- Pricing power must be there with the company for its products or services i.e. the company must have dominance over its customer,distributor,retailer
- There must be sufficient head room to grow its business.
- The company must have the ability to throw cash to the share holders (may be in a longer period of time)
- Must be professionally run company.If it is 1st or 2nd generation company,then 1 or 2 family members of the promoter in the board is okay.
- All the key positions in the company should not be held by family members.
- The company should be such that ,any idiot can run it.
- Management should be good at capital allocation.
- Stock must be available at good valuation.
- If FIIs/DIIs have less holding,then it is better.
19 July, 2022
My Check List for Buying a Company
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ReplyDeleteGood try to put your thoughts on paper. It's not easy to find such company for reasonable valuations in the current scenario. But hell yes, you can wait for the fat pitch. Just one suggestion - All your criteria are very vague and qualitative. Please add few quantitative criterion as well. For Ex. ROCE should be above 20% for the last 5/10 yrs OR say NPM should be above 15% in the last 5 /10 yrs OR something related to cash flows. YES. I agree these are kind of rear-view mirror ideas, but you can consider adding few of these in your checklist.
ReplyDeleteRegards,
dr.vikas
Thanks ...Vikas....earlier I used to prepare my check list with some quantitative parameters.But over the years what I realized that ,the moment I use quantitative parameters,I loose the rationale of understanding or evaluating a particular business.Because investing is an art and quantitative parameters fix me in certain direction only.For example If I use 20% ROCE as my bench mark ...then if a business like ITC is available at 5% dividend yield ...15 PE...with ability of retaining business for years , having pricing power and customer loyalty is available at 15% ROCE...then shall I discard it.What am I trying to say is high ROCE is not the sufficient condition for good business.But if I chose a business having future headroom,pricing power,customer loyalty,entry barrier etc, then these will by default take care of my ROCE,ROE etc.What I think is,quantitative parameters are useful when I can calculate the outcome in present, because I can verify the result.But in investing, the result will come in future only.So ,I can't verify it in present.Then What options I have left with.The only things that I can do is,avoiding mistakes,sticking to margin of safety etc.And thinking logically , my psychology and behavior plays important role in it.On a lighter note,If I have to prepare an algorithm for selecting stocks,then ,the algorithm will be, more logic driven ,than data and ROE,ROCE,PE,Market cap,Dividend yield etc. etc.. all will be part of logical arguments only....I am just a student.... and I will learn from your ideas.
DeleteThe Checklist looks wonderful, but can you show us Practically how to go point by point while selecting company, How an Retail investor can know "There must be sufficient head room to grow its business" and "Entry Barrier must be there in the business so that other companies can't take over its business or take its future business opportunities"
Deletethanks siraj....I will post in detail...about what you asked....just need little bit time to draft..
DeleteCheck list excellent . But it's not easy to follow all, at least try to follow few also good.
ReplyDeleteThanks for the suggestion...I will be posting about my mistakes as well as the opportunities that I missed.....Frankly speaking I can derive a list of companies based on the above check list....but why it seems difficult to follow is...we do not have patience to sit with cash and to wait for the right price to come.
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