Following are my 12 points check on any stock idea that came in my radar. Most of them learnt from books and sharing’s of Aziz and many others. This is still work in progress but running the stock with these filters gives me more confidence to delve more into the business. If a business doesn’t cross these hurdles, I just skip them.

 

 

1. Balance sheet. Check total debt and net worth. Divide them. Anything less than 0.5 is good. If it’s decreasing year on year much better. If a stock doesn’t satisfy this, skip the stock/business.

 

2. How is the share capital? I like firms which do not dilute the equity capital every year. A constant value is great to have. If you don’t see it. Investigate further.

 

3. Divide current assets by current liabilities. A ratio close to 2 and more is better. Check the long term trend. Less than one needs more investigation.

 

4. Go to cash flow statement. Check cash from operation. It should be positive. Check the long term trend that the business is generating cash from operation.

 

5. I like business that stays within their means and their 4 or 5 year average cash earning is more than the cash spend on investments.

 

6. Cash from financing. It’s should be negative. Meaning the business is paying back debt. Good because it means profit is meant for you and not for a bank.

 

7. Now to the income statement. Sales should be increasing. If they are decreasing for 2 to 3 years in a row, skip.

 

8. If Net profit / sales less than 10. Skip. See both long term and yearly figures. A business without adequate profits from sale is like breathing air without oxygen.

 

9. Dividend paid and what is the percentage of net profit. For me more than 10% of profit is good.

 

10. See what the percentage of net profit to interest expense is. Lower the better. This means the company is working for you and not the banks it has taken loan from.

 

11. Divide earning per share by previous year book value. That’s return on equity. Anything more than 20 is great. Long term trend should be positive.

 

12. Check average 4 year quarter result and see net profit is going in positive direction.

 

 

Ideal business is one with high cash earning and great ROE and low Debt. Then comes the all important price.

 

After a business is recognized, the next and only risk in the stock market is the price that we pay for that business.

 

Lower the better. Here patience is the key.