Investing in stocks just based on someone’s advice is very risky. It is important to have your own checklist to identify stocks. Checklist attached below is not fully exhaustive but it is least one should check.
1. The company should have zero or very little debt . Consider the companies having Debt – Equity ratio less than a half. This way, you will avoid companies that have high risk of default.
2. Last three year CAGR sales growth rate and CAGR profit growth rate is between 10 % to 15%. This ensures that company’s profits are growing at consistent rate.
3. Last three years average return on equity and return on capital employed both are greater than 15 % . This ensures that the company is utilising its funds in an effective manner. Return on capital employed is more relevant for the companies having high debt.
4. Make sure that promoters shareholding is not declining and is high. As promoters have insider information that public do not have, tracking promoters shareholding tells a lot about company’s future trajectory.
5. Promoters pledge is less than 5 %
6. PE ratio is less than industry average and less than last five years of average PE ratio.
7. Receivables days are consistent or are falling. Receivables days tell us about days taken to collect cash from customers.
After short listing , look more deeper into these stocks and select the best one .
In later vlogs, checklist for qualitative analysis will be shared.
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