> For the complete documentation index, see [llms.txt](https://www.indiainvestments.wiki/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://www.indiainvestments.wiki/stocks/due-diligence-checklist.md). # Due-Diligence Checklist ## 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?