Checklists

Understanding a business is essential when valuing that business, as it will help you in making forecasts of growth and earnings as well as establishing the business’s long-term viability.

1. How well do I understand the business
2. How strong is the economic moat of the business
3. How recession proof is the business
4. Does the business have multiple income streams
5. Does the business have multiple income streams
6. Has the business successfully expanded its business or product offering into multiple locations
7. Is the business free from governmental influences
8. What phase is the business in; Start-up, Expansion or Mature Phase
9. Is the business operating in a popular sector or field

Financial characteristics are considered when conducting a Quantitative or Fundamental Analysis of the business. To analyse the financial strength of a company you will be using the annual or bi-annual financial statements of a company. You will be analysing the company’s balance sheet, income statement and cash flow statements in particular. It is helpful to calculate your results on a per share basis; this will avoid any surprises in a company’s earnings due to changes in the number of shares it has on issue.

1. Does the company consistently grow its earnings or earnings per share (EPS) 
2. Does the company consistently generate positive operating cash flow
3. Free Cash Flow is increasingly growing at a consistent rate
4. Is the company using shareholders’ money wisely
5. Can the company maintain earnings growth after acquisitions
6. Is the PEG Ratio less than 1
7. Abnormal items are not consistently affecting the earnings
8. Is the company able to maintain or improve it’s profit margins
9. The company is consistently achieving high Returns on Equity (ROE), Invested Capital (ROIC) and its Assets (ROA)
10. Is the shareholders’ equity rising on a regular basis
11. Has the number of shares outstanding remained steady or decreased over time
12. Is the inventory turnover remaining constant or increasing
13. Goodwill is not excessive and requiring numerous write downs
14. Does the company have a current ratio of greater than 1
15. Does the company have a low debt to equity ratio
16. Does the company have an increasing or high interest coverage ratio
17. The company is not required to expend great amounts of capital just to remain competitive
18. Are receivables decreasing as a percentage of revenue

Having great management may not be as important to a business as having great financials and an ability to generate cash. However, it still pays to assess how well the company is run and the competence of management. Also, to understand where management sees the business heading and if they have foreshadowed any major changes to operations which could have a big impact on the value of a company is very important to be across. Some of these points may be hard to find or research however, that shouldn’t prevent you in trying to gain an insight into the way management is thinking about the future of the business. You may find it helpful to read some of the CEO’s previous letters to the shareholders for any relevant information.

1. Has management made any announcements about growing the business
2. Does management deliver on its promises
3. Are dividends consistent and not excessive
4. Is management being fairly paid
5. Do directors own shares in the company
6. Are directors buying shares

If your only concern is to receive high returns, then the ethical standards of a business will not be of great concern and will have little impact on your final investment decision. I do believe however that it doesn’t hurt to still include some sort of ethical checklist in your final decision. Just like changes in technology, changes in community ethical beliefs can have a major impact on a particular sector and its possible future returns. Below are some checklist items that I personally use; you can adapt these to suit your own situation.

1. The company does not exploit its workforce
2. Animals are not used as a commodity or profited from in any way
3. The environment is not negatively impacted by the company and its operations
4. The products which the company produce does not take advantage of its customers
5. The company and its products do not negatively impact the health of the public or its customers