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Due-Diligence Checklist
A checklist to reference while performing due diligence on a company.
Sector/Industry
- The Product
- What is the sector primarily selling?
- How is the sector sub-classified based on product segments? (for example, FMCG can be categorized into home care, personal care, food products, etc)
- What is the market size for the product?
- Is the product prone to disruption from an alternate solution?
- Brief History / Key Events
- What are some key events that have had material impact on the industry?
- What are the domestic policies that affect the sector; what forthcoming policies are expected; how will they affect the sector?
- Value Chain
- What are the key raw materials & machinery/equipment required to build the product?
- Where does the sector largely source these raw materials & machinery/equipment from?
- What are some geographical advantages that preferred production destinations enjoy?
- What kind of labour force/workers are required for conducting the production process?
- What are steps involved in the core production process?
- What is the preferred strategies for marketing, distribution, delivery & installation of the product?
- How capital intensive is the production, marketing, distribution, delivery & installation of the product?
- Market Overview
- How mature is the sector domestically? Is the sector expecting a turnaround from the current trend?
- How is the product's market share split between organized & unorganized players? Which way is the market leaning now?
- How is the product's market share split between domestic & international players? Which way is the market leaning now?
- Who are the key players that set the trend for the sector? (in terms of pricing power, product innovation, market practices)
- Who are the emerging players that could have material impact on the trend for the sector?
- What barrier to entry does the sector enjoy?
- Industry Benchmarks / Key metrics
- Industry's preferred benchmark for capacity
- Industry's preferred benchmark for utilization
- Industry's preferred benchmark for consumption
Business
- Brief History/Key Events
- When was the company founded?
- What are some key events that have had an impact on the core operations of the company?
- What are some key events that have had material impact on the stock price?
- Value Proposition
- What is the company primarily selling?
- What product segment is the company catering to?
- Where does the product fit in the market? Is there something that differentiates the product against competitors?
- What is the addressable market size for the product?
- What is the product's market share, mind share, or position in the market?
- Business Model
- A brief overview of the business model of the company.
- What are the growth avenues for the company?
- How does the company market its product?
- What is the capital allocation policy of the company?
- What is the earnings retention policy of the company?
- What is the dividend distribution & buyback policy of the company for earnings not retained?
Financials & Ratios
- Profit & Loss Statement
- What does the revenue & profit breakup look like between different businesses of the company?
- What does the revenue & profit breakup look like in terms of the geographies the company sells to?
- What has been the revenue growth for the past 3, 5 & 10 years?
- What has been the EBIT (earnings before financial costs & taxes) growth for the past 3, 5 & 10 years?
- What has been the net earnings **growth for the past 3, 5 & 10 years?
- Is the revenue of the company overly concentrated within a few clients?
- Balanced Sheet Statement
- Is the balance sheet clean/strong?
- How does equity dilution look like in the past few years for the company?
- How much cash, or equivalents does the company hold currently?
- What's been the major capital expenditures that the company has done in the past few years?
- How does regular capital expenditure look like for the company?
- What is the quantum of debt obligations for the company?
- Is there inventory building up for the company?
- Does the company face issues with collecting cash — Is there receivables building up for the company?
- Cash Flow Statement
- Are cash flows from operations comparable to net earnings?
- If CFO > Earnings, cash is not translating to earnings in the P&L statement
- If CFO < Earnings, there may be early revenue recognition without realizing/collecting it
- How much cash is being left after tending to operational expenses and capex (free cash flows)
- Are there any anomalies/red flags in the cash flows of the company?
- Profitability Ratios
- What has been the trend for operating margins for the past few years?
- What has been the trend for net profit margins for the past few years?
- What has been the trend for return on capital (roic/roce) for the past few years?
- Capital Ratios
- Is the company over-leveraged? (in terms of debt to equity etc)
- What is the latest cost of equity, cost of debt, & thus weighted average cost of capital for the company?
- Is the company able to service its debt obligations? (in terms of interest coverage ratio, quick ratio etc)
- Efficiency/Operational Ratios
- How much time does it take for the company to convert its investments into cash? (in terms of cash conversion cycle)
- How much time does it take for the company to convert its inventory into sales? (in terms of inventory days/inventory turnover)
- Industry Benchmarks
- How does the company stack up against peers in terms of industry benchmarks (like capacity utilization, average revenue per user, revenue per room, gross merchandise value etc)
Management
- Overview of promoters & management
- Are the managers of the company competent enough to run it?
- Is the management style overly conservative or aggressive?
- Have the actions of the promoters or managers been in the interest of minority/retail shareholders?
- Have the promoters or managers been transparent & integrous in actions that impact the operations or valuations of the company?
- Is there a proper succession plan in place for key positions of the company?
- Is the management of the company being remunerated more than they should be?
- Do the promoters or managers of the company communicate well with the shareholders (hold conference calls, conduct interviews, answer to investor relation emails, etc)?
- Shareholding Pattern
- What has been the trend for promoter shareholding in the recent past?
- How does the distribution look between retail and institutional shareholding?
- Is there enough free float? Are the shares of the company liquid?
- Is the quantum of shares pledged a concern?
- Red Flags
- Is there any pending litigation against the promoters or managers that can materially impact the stock?
- Is there any pending litigation against the company that can materially impact the stock?
- Are there too many/suspicious related party transactions taking place?
- Is the structure of the company too complex (in terms of subsidiaries, holding companies etc)?
- Are there any red flags in the auditor notes?
Valuation
- Multiples
- What multiples have been used to evaluate the valuation of the company, if any?
- How do the multiples compare versus peers in the same sector?
- Is there a significant discount for risks that the multiples of the company suffer from? Why?
- Is there a significant premium for moats that the multiples of the company enjoy? Why? Does the moat show up in financial statements?
- Has there been a significant rerating of multiples for the company? Why?
- Valuation Models
- Have you used any valuation models (such as Discounted Cash Flow or Discounted Dividend or Sum of parts) to evaluate the company?
- If a valuation model has been used, what is the approximate intrinsic value of the stock as per the model? What discount does the stock price enjoy with intrinsic value in context?
- Valuation Philosophy
- Would you characterize buying of the stock as value investing, or growth investing?
- Is there adequate margin of safety in an investment in the stock? What constitutes it?
Investment Thesis
- Consideration of investment
- What is your primary thesis for investing in the business?
- What is the expected duration for which the company is being bought?
- What are the quantitative factors that could invalidate this investment thesis?
- What are the risks or threats that could cause invalidations to this investment thesis?
- What would conclude your investment in the company if everything goes according to the thesis? What is the exit plan?
- Is your investment thesis in consensus with other participants of investing forums such as r/IndiaInvestments Subreddit/discord or ValuePickr? Does this classify as a contrarian bet?
- Is your investment thesis based on a corporate action or a key event that would have material impact on the stock price? Does it therefore qualify as a workout investment?
- Should this transaction be avoided?
- Where does the primary thesis for this investment come from? Was it peddled on a news channel/social media post or did it come into your radar as a consequence of independent research?
- Is the investment being done due to Fear of missing out on positive price action momentum?
- Can the investment qualify as a case of Catching a falling knife?
- If you're exiting an investment because it has fallen significantly/sharply, is it because something has changed fundamentally about the business or its future earning potential?
- How does the stock fit into the overall portfolio? How much do you own of that sector/country already?
- Staying on track
- Does the latest Quarterly earnings report validate or invalidate your investment thesis?
- Does the latest Annual report provide you any material information that could validate or invalidate your investment thesis?
- Does the latest Investors call or management interview provide you any material information that could validate or invalidate your investment thesis?
Last modified 3mo ago
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