Purpose: To systematically evaluate potential investments by assessing key financial, operational, and strategic factors.
Date of creation: 2024-07-04
- Is the business within your circle of competence?
- Can you explain the business model in one sentence?
- Does the company operate in a stable or growing industry?
- Is the industry free from significant regulatory uncertainty?
- Is the business resilient to economic cycles?
- Calculate and assess: EBIT/EV ratio
- Calculate and assess: Normalized EBIT/(NWC + Net Equipment) ratio
- Review debt levels: Is the balance sheet healthy?
- Analyze free cash flow generation over the past 5 years
- Calculate owner earnings (adjusted free cash flow)
- Identify the company's primary competitive advantage (moat)
- Assess the company's market share within its industry
- Evaluate the company's pricing power: Strong, Moderate, or Weak?
- Analyze the company's brand strength or customer loyalty
- Review the company's operational efficiency compared to peers
- Threat of new entrants: High, Medium, or Low?
- Threat of substitute products or services: High, Medium, or Low?
- Bargaining power of customers (buyers): High, Medium, or Low?
- Bargaining power of suppliers: High, Medium, or Low?
- Intensity of competitive rivalry: High, Medium, or Low?
- Verify management's ownership stake
- Review past shareholder communications for honesty
- Assess capital allocation decisions over the past 3-5 years
- Check for any history of unprofitable expansions or acquisitions
- Evaluate the use of excess cash (e.g., dividends, buybacks)
- Project normalized EBIT for the next 3 years
- Identify specific growth opportunities or new markets
- Assess alignment with long-term industry trends
- Evaluate the scalability of the current business model
- Review the company's R&D or innovation pipeline
- List top 3 risks that could significantly impact the business
- Calculate the margin of safety in the current stock price
- Compare key valuation multiples to industry peers
- Review accounting practices for any red flags
- Assess your comfort level with a 5-10 year holding period
- Does this investment improve portfolio diversification?
- Rate your confidence in the business (1-10 scale)
- Is the potential return worth the identified risks?
- How does this investment fit with your overall investment strategy?
- Make a final decision: Invest, Watch, or Pass
Action: Discuss findings with your investment team. Document your analysis for each section to support your final decision.