Core business
The first thing I look at when evaluating a stock to buy is the
company’s business model. What it does and how it generates profit is
important.
In this respect, I will consider the competition of the industry, the
quality of its products, barrier of entry, availability of raw
materials, as well as the demand and necessity of its products and
services.
Calibre of Management
Competency and Integrity counts. Competency without integrity is worse
than integrity without competency. Incompetency of the management is the
main cause of failure. The only way for you to know the management is
to look at its record. A growing revenue, improved earnings and dividend
payments year after year are the things to look at.
Balance Sheet (BS)
The BS is an important statement. It tells you what the company has and
what it owes others. Once studied, you will know whether the company is
solvent or not. An insolvent company is somebody’s problem which you
shouldn’t get involved with.
Current Ratios, Free Cash Flow, Borrowings, Receivables, Payables, Pay-up Capitals, Par Value must all be carefully considered.
Metrics such as EPS, Dividend Yields, Profit Margins, Current Ratio,
Debt-equity-ratio, ROCE & Price-to-book Ratio are some important
metrics to look at closely. (Refer to Investopedia.com, if you do not understand any of the terms mentioned.)
Income Statement
Quality of earnings must be carefully look at. Not all earnings are the
same. The important thing to think about is whether the earnings are
sustainable or improved going forward.
Cash Flow Statement
How cash flow in and flow out must be analysed carefully. Looking at the
bottom line alone is not enough. You must know the details.
CEO’s Statement
The CEO is the most important person in a company. Know who the person
is. Failure or success of the company depends on this person rather than
on anything else. Besides being competent, the person must have
integrity as well.
Dividend Policy
I like companies that have a dividend policy of paying 30% to 50% of its
earnings to shareholders. I don’t like to share risk without sharing
the gains. A company that pays regular dividends in tandem with its
earnings is preferable to one that pays no dividend in the name of
growth. Bear in mind that the only benefit a minority shareholder has is
the dividend.
Major Shareholders
The major shareholders control everything. If, for whatever reasons, you
don’t like them, avoid the stock. On the other hand, strong major
shareholders can do wonder for the company. Next time, when you are
about to buy a stock, don’t forget to find out who the major
shareholders are.
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