Research is fundamental in every area of our life. Investing is also not outside of it. Whether fixed income, Commodity, or Equity, it’s essential to check before investing. Unfortunately, there is no hard and fast checklist for doing such things. But still, Some things are crucial. In this post, I am trying to explain some of them.

  1. Corporate Profile: A). What is the company doing for existing, giving its investors a return on capital and making wealth? Some companies are doing more than one thing, like Goldman Sachs. Mutual funds, Banking services. So how to analyze them? For that, do you need to find what their product or service makes them the most considerable revenue? The best example here is ITC. However, they manufacture many products from Perfume, Note Books, Beauty soap, Biscuits, hand wash named Savlon, Fruit Juice, and much more. But 60% of their revenue comes from Cigarettes. Even with banks, you suppose to study the sector-wise allocation to advances. Like how much percentage is toward Airlines, Infrastructure, utility, Chemical, Home loans, etc., it helps you assess the risk profile of such banks so you can study the difference between Deutsche Bank and Bank Of America. B ) the company’s position in the industry also makes a difference. You can’t compare Vanguard and T Rowe’s Price. Both of them are different. But you can compare Vanguard and DSP BlackRock. Both of them are in the same type of business. C) What is the history of the company? Volkswagen, Chevrolet, JLR, Ford. History Matters. Isn’t it? D) Some businesses need research and development, which increases Costs and makes them capital-intensive businesses. The Pharmaceuticals business is one out of it. Another example is the Technology sector. You can’t ignore Research and Development in businesses like Alphabet, Apple, and Amazon. Capital expenditure is critical as working capital expenses are often the same for many businesses. Still, it is capital expenditure making an identity for the business. E) Board structure and management are also making a difference. Making acquisition difficult and defending your own company is one objective for making changes under the name of a staggered board. Such a thing is bad for investors as if the takeover possibly makes wealth for shareholders. Corporate Governance is also one more important thing that affects return. You don’t want to invest where management ignores even the shareholder holding more than 11%. Warren Buffett is correct about it when he says he chose companies where management is not trying to keep their job and thinks of making wealth for shareholders. Management is essential in such an analysis. Management Buy-in or management buyout may make changes that make the company successful or fail. Jeff Bezos, Steve Jobs, KM Birla, Uday Kotak, Warren Buffett, and Travis Kalanik are examples of management who makes good companies either from zero or develop the already great business. F) Retirement benefits are one important factor. If the company follows the Defined Benefit plan, then if there is any shortfall in a retirement plan, the company is supposed to make provision for it, which affects shareholders’ wealth and acts as debt. G) Insider ownership may make or break a company. In fact, in his world-famous book, One upon wall street, Peter Lynch mentions that if insiders are buying the stock, there is only one reason: the future is good for the company. Berkshire Hathaway, Insiders, are holding very more minor. The reason is when insiders own a Large chunk, they can take any decision which is good for them, like giving a special bonus to some special people who are nothing but relatives of the promoter. Shareholders holding large chunks may sell the company ahead of the small shareholder at a different price, which is entirely unethical. When such happens, regulators and the judiciary come into the picture. Is there any action pending against the company? Because such things make an uncertain situation, finally affecting business. H) But sometimes, there are some unique advantages for the company. Warren Buffett Perfectly mentions them as MOAT. Simple Example is Google in Internet browser business, Amazon in Cloud business, and E-commerce. Facebook in Social Networking. You can’t defeat them in their business.
  2. Industry Characteristic: A) Exactly at what stage is the industry? Is it in childhood? or Growth? or shakeout? How much is the industry sensitive to economic changes? The automobile and infrastructure sectors are different, and so are the companies in them. You may be shocked, but increased demand for explosives is the starting point for many new things in the economy, like mines, metal, and commodities businesses need them. More the demand for explosives from mining companies, more the production from them. B) life cycle of products in many industries is limited. Take an example of a Kodak camera. Great product but not unlimited life. 2G technology? Calls on mobiles? The reason is when technology is changed, that product may face competition. Manufacturer of Photocopy machine, Xerox, was maybe stunned when they realized that high-resolution camera, Internet messaging like whats app and simple computer printer might make their headache. It was not even in the dream for Kodak that Samsung and Apple would give them good competition. But you cant say the same about Good Year TYRE  or MRF. They are in business. C) A customer is the one who is paying for all expenses of companies. Is it possible for your brand to keep him loyal to you? I am not making any inappropriate comments. Amazon brand is doing that. But some industries can’t do that. All players in the industry are making homogeneous products. But still, they will advertise it by saying their product is different than others. A water Purifier is the best example. D) Sometimes, there are high entry and exit barriers in some industries. Such industries are various, and you can’t ignore them. The best example is Reliance Jio, that company that is making life worst for many telecom operators and is not a new entry. It has existed but with a different name and under a different owner. Mukesh Ambani only Buys it. The reason he knows that entry is difficult for the new player. similarly, if you are a factory owner in India having some debt, you can’t shut it down one fine day and leave. ( though Vijay Mallya did that. Not shut down full-fledged.) there is some restriction from govt, which will act as Exit Barriers. E) several competitors. Simple thing. More competition, more expense, high risk. Combination with a High Exit Barrier will make life worse for a company making profitability low. You don’t want to invest in such companies. F) Industry supplier consideration. The whole problem for the Indian IT industry is here. Indian IT industry is all outsourcing from the US. NOW after the Trump administration takes adverse action on H1-B visas and makes outsourcing difficult, SUPPLIER for these companies like INFOSYS, TCS, TECH MAHINDRA is in panic. Their profitability and also revenue are in Danger. Perfect example. G) Govt regulation. Operating in tight regulation is a double edge sword. You can understand it by comparing Mutual funds and Hedge Funds. one is wholly regulated, and another is not regulated—investments in one and another having completely different. H) Is the industry utterly dependent on technology or beneficiary of technology. Companies like Google and Walmart are others in their industry. And you can’t ignore it while analyzing companies. I) sometimes, the whole industry depends upon labor. In such a case, problems in one company may affect another. So relation with labor in industry is significant.
  3. Demand for the company’s product and service: A) Where is the demand coming from? is there one single buyer dominating? Any single geography? I saw many examples where there is one dominant factor in demand, which was the reason for the downfall—the vital thing to check. Say even if that dominant factor will not go outside of business, the risk for the company is sufficiently significant. B) Product differentiation:  How do different products companies have ? are they serving customers? or are they competing? Cannibalisation is the thing. The best example here is Google Duo. There was no need to develop such a product when there is Hangout available for the large public as it is in-built into all Android phones. In some cases, the new product will start giving competition to its product. C) Outlook: is it good? I saw many companies where their products are either useless or will be in a short time. If not, How large is the market for it? The best example is again Indian E-commerce. So many Venture Capitalists, Private Equity, and Entrepreneurs entered, but their calculations went wrong with the market size. Many of them take it as a population of 1.25 billion. Funny. Many of India live in rural areas and are unaware of Flipkart and Paytm. In such a case, if you decide to sell fashion clothes and not everyday items, you will lose.
  4. Supply of products:  Is it possible for a company to sell its product wherever there is demand? Is the network strong? once again, India is tough to market. From Kashmir to Tamil Nadu, from eastern states known as the seven sisters to Gujarat, there is a large diversity in geography and religion. Selling products to all customers is challenging. Making yourself a leader is not a small thing. Ultratech cement, Hero Honda, Maruti, and Airtel are leaders in their segment. It is not an easy game. However, if the company exports its products, the picture is different.
  5. Analysis of Cost: What and how is the company’s cost structure. There are many types of Costs. Operating Cost, administrative fee, finance cost, Cost of goods sold, and labor cost. Which kind of Cost is dominant. You don’t want to invest in a company where the finance cost is high as it is not in companies hands, and if interest rates increase, no one can handle it.
  6. Pricing Power: some business doesn’t have pricing power, whereas some hold significant control over pricing. Pharmaceuticals, Automobiles, and Mobile Phones hold excellent pricing power. Some sectors don’t have such can’t keep. The best example is Depository like CDSL and NSDL in India. Their business is holding securities in Electronic format in the account of investors. Like banks have money. It is interesting that even though there is such a helpful service, they can’t decide to price. Its SEBI, our Capital Market regulator, holds pricing power, so both have the exact pricing. The banking business partly has pricing power but say, if I want 10 million as debt. If I have a good rating, then I can negotiate with banks.
  7. Relevant Financial Information: Though there are many ratios, not all are useful everywhere. But still, I am writing some of them. here is a list

Debt to capital, debt to an asset, Financial leverage ratio, cash flow to debt, interest coverage, Off-balance sheet liabilities, Growth Rate of REVENUE and Profit, Net Income, Net Profit, Operating Cash Flow, EPS, ROA, ROE, ROIC, GROSS PROFIT, Operating Profit, Current Ratio, Quick Ratio, Cash Conversion Cycle,