My Research Methodology/Financial Due Diligence--- Detailed
Methodology:
1. Rebuild the history and profile of the company.
--------- Such as
a. Differential analysis: What management said in one year vs what happened in the next year; things said in different statements
b. Recent new releases
c. Industrial or government data and statistics
d. Pending litigations or cases against company
e. Management profile : Background check analysis
f. Competitors, suppliers, customers and products.
2. Financial Health ( I say sometimes numbers should speak every thing and not management)
a. Capital Structure ( Debt-to-equity ratios) ---Composition of Debt and Equity
b. Off Balance Sheet items Basically items stand outside the balance sheet ( In simple understanding )( Source: Companies Annual report ) and its impact.
c. Credit Rating given by CLSA etc companies ( Here I refer reports of rating companies)
d. Cash Liquidity ( Infact most important factor I look into when company is facing problem at raising short term funds ) & One more aspect one has to look here Increasing Debtors without proportionate in increase in sales from year on year.(Generally Increasing is Bad Signal )
e. Profitability, 10 yrs Average Top Line growth (I meant here is Sales), ------I Ignore this if it is a turnaround company ( Troubled companies making plans to return operations to normalcy position )
f. Product Mix and Product margins.
g. DuPont analysis: Cash conversion rate x Net Margin x Asset Turns x Gearing = Cash ROE
h. At times I consider paying a company valued below liquidation value ( Value realised by share holder if company assets are disposed , It happens due to financial health not proper with poor management: Reason behind this it can be a takeover target sometimes by other company.
I. Net Current Assets Value ( Current Asset : which can be realised in less than 12 months)
j. Any Tax benefit enjoyed by the company ( Advantage: Capital Expenditure).
k. Capital Expenditure Vs Depreciation (I say it tells asset efficiency)
l. Amount of cash required for expansion of business in future.
k. Increase of Research expenditure (: Analyse this in terms of creation of any brand)
l. Companies ability to raise fresh funds from capital markets.
m. Promoter stake and stake held by Top Management ( It shows their interest towards their own business)
3. Business Excellence & Other Factors:
a. Customer happiness towards company's product ( I Say "It costs the company to get a new customer not as costly as to retain back old customer "---------Tagline given by Manideep (Selected in top ratings :Grant Thornton)
b. Entry Barriers created by Company ( Competitive advantage created by company : Eg: SKM Egg products )
c. Is the business defined properly and have clear view in future terms
d. Do the company have concentrated suppliers and customers.
e. Product pricing policy (Say increase in product price can increase sales?)
f. Macro Business environment ( Company business in terms of India as a whole )
g. Risk of company's customer default in making payments ( Analysing this is difficult but can be understood w.r.t management transparency & communicating each every matter to investor through press release -------Here Management integrity plays key role
h. Tendency of corporate management to imitate the behaviour of other managers.
i. Can the companies revenue & profit growth numbers are explained clearly w.r.t management sayings in the recent past.
3. Safety or Risk or Loss of oppurtunity :
a. Downside risk and margin of safety ( Basically timing of buying company's capital )
b. Reason has to why it is undervalued and why there is no interest of buying ?
c. Do I compromise my margin of safety or the quality/depth of my research because of lack of patience? ( Patience is very important when investing in capital market . I say one has to look capital markets ; 5 years time)
d. Value comparison with industry averages.
e. Is the general market overvalued ?
--------- Such as
a. Differential analysis: What management said in one year vs what happened in the next year; things said in different statements
b. Recent new releases
c. Industrial or government data and statistics
d. Pending litigations or cases against company
e. Management profile : Background check analysis
f. Competitors, suppliers, customers and products.
2. Financial Health ( I say sometimes numbers should speak every thing and not management)
a. Capital Structure ( Debt-to-equity ratios) ---Composition of Debt and Equity
b. Off Balance Sheet items Basically items stand outside the balance sheet ( In simple understanding )( Source: Companies Annual report ) and its impact.
c. Credit Rating given by CLSA etc companies ( Here I refer reports of rating companies)
d. Cash Liquidity ( Infact most important factor I look into when company is facing problem at raising short term funds ) & One more aspect one has to look here Increasing Debtors without proportionate in increase in sales from year on year.(Generally Increasing is Bad Signal )
e. Profitability, 10 yrs Average Top Line growth (I meant here is Sales), ------I Ignore this if it is a turnaround company ( Troubled companies making plans to return operations to normalcy position )
f. Product Mix and Product margins.
g. DuPont analysis: Cash conversion rate x Net Margin x Asset Turns x Gearing = Cash ROE
h. At times I consider paying a company valued below liquidation value ( Value realised by share holder if company assets are disposed , It happens due to financial health not proper with poor management: Reason behind this it can be a takeover target sometimes by other company.
I. Net Current Assets Value ( Current Asset : which can be realised in less than 12 months)
j. Any Tax benefit enjoyed by the company ( Advantage: Capital Expenditure).
k. Capital Expenditure Vs Depreciation (I say it tells asset efficiency)
l. Amount of cash required for expansion of business in future.
k. Increase of Research expenditure (: Analyse this in terms of creation of any brand)
l. Companies ability to raise fresh funds from capital markets.
m. Promoter stake and stake held by Top Management ( It shows their interest towards their own business)
3. Business Excellence & Other Factors:
a. Customer happiness towards company's product ( I Say "It costs the company to get a new customer not as costly as to retain back old customer "---------Tagline given by Manideep (Selected in top ratings :Grant Thornton)
b. Entry Barriers created by Company ( Competitive advantage created by company : Eg: SKM Egg products )
c. Is the business defined properly and have clear view in future terms
d. Do the company have concentrated suppliers and customers.
e. Product pricing policy (Say increase in product price can increase sales?)
f. Macro Business environment ( Company business in terms of India as a whole )
g. Risk of company's customer default in making payments ( Analysing this is difficult but can be understood w.r.t management transparency & communicating each every matter to investor through press release -------Here Management integrity plays key role
h. Tendency of corporate management to imitate the behaviour of other managers.
i. Can the companies revenue & profit growth numbers are explained clearly w.r.t management sayings in the recent past.
3. Safety or Risk or Loss of oppurtunity :
a. Downside risk and margin of safety ( Basically timing of buying company's capital )
b. Reason has to why it is undervalued and why there is no interest of buying ?
c. Do I compromise my margin of safety or the quality/depth of my research because of lack of patience? ( Patience is very important when investing in capital market . I say one has to look capital markets ; 5 years time)
d. Value comparison with industry averages.
e. Is the general market overvalued ?
4. Answer to your self (Final Factor):
a. Am I incorporating new information in a Bayesian way (Probabilistic way of thinking )?
b. Am I rushing, losing patience, stressed, over excited? Or is my mood swung by the market direction?
c. Overconfidence? There is no way to eliminate all the risks. There are always unknown unknowns. Don't overexpose in one position
d. How would I feel if the stock loses 50%? How would I feel if the stock gains 50% but I haven't bought any shares?
e. Should I take profit in cyclicals?
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