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Vijay Malik

This document provides criteria for evaluating companies across several categories: financial analysis, valuation analysis, business and industry analysis, management analysis, and other business parameters. Key metrics include sales growth over 15%, net profit margins over 8%, debt to equity ratio below 0.5, P/E ratio below 10, earnings yield above 10-year government bond yield, consistent dividend growth, and promoter shareholding over 51%. The company should demonstrate sustained growth, strong management, and high-quality business fundamentals.

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Jerry Louis
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498 views4 pages

Vijay Malik

This document provides criteria for evaluating companies across several categories: financial analysis, valuation analysis, business and industry analysis, management analysis, and other business parameters. Key metrics include sales growth over 15%, net profit margins over 8%, debt to equity ratio below 0.5, P/E ratio below 10, earnings yield above 10-year government bond yield, consistent dividend growth, and promoter shareholding over 51%. The company should demonstrate sustained growth, strong management, and high-quality business fundamentals.

Uploaded by

Jerry Louis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Criteria

Value

Remarks

CAGR >15% for


last 7-10 years

Growth should be
consistent year on year.
Ignore companies where
sudden spurt of sales in
one year is confounding
the 10 years performance.

FINANCIAL ANALYSIS

1 Sales growth

2 Profitability

NPM >8%

3 Tax payout

>30%

4 Interest coverage

>3

Debt to Equity
ratio

6 Current ratio

< 0.5

Very high growth rates of


>50% are unsustainable.
Look for companies with
sustained operating & net
profit margins over the
years
Tax rate should be near
general corporate tax rate
unless some specific tax
incentives are applicable
to the company.

Look for companies with


D/E ratio of as low as
possible. Preferably zero
debt

>1.25
Positive CFO is necessary.

7 Cash flow

Cumulative PAT
vs. CFO

CFO > 0

cPAT ~ cCFO

Its great if CFO meets the


outflow for CFI and CFF
Cumulative PAT and CFO
are similar for last 10
years

VALUATION ANALYSIS
1 P/E ratio
2

P/E to Growth
ratio (PEG ratio)

< 10
<1

Such companies provide


good margin of safety

Earnings Yield
(EY)

4 P/B ratio

> 10 year G-Sec


yield

<1

Price to Sales
ratio (P/S ratio)

< 1.5

Dividend Yield
(DY)

> 0%

EY should be greater than


long term government
bond yields or bank fixed
deposit interest rates
However, I find P/B ratio
irrelevant for sectors other
than financial services
James OShaughnessy:
Buy if P/S ratio is < 1.5
and sell if >3
Higher the better.
DY of >5% is very
attractive. However, do
not focus a lot on DY for
companies in fast growth
phase

BUSINESS & INDUSTRY ANALYSIS


1

Comparison with
industry peers

Sales growth >


peers

Increase in
production
2
capacity and sales
volume

Production
capacity & sales
volume CAGR ~
Sales CAGR

Conversion of
3 sales growth into
profits

Profit CAGR ~
Sales CAGR

Conversion of
profits into cash

cPAT ~ cCFO

The Company must show


sales growth higher than
peers. If its sales growth is
similar to peers, then there
is no Moat
Company must have
shown increased market
penetration by selling
higher volumes of its
product/service
A Moat would result in
increasing profits with
increasing sales.
Otherwise, sales growth is
only a result of
unnecessary expansion or
aggressive marketing
push, which would erode
value in long term
If cPAT >> cCFO, then
either the profits are
fictitious or the company
is selling to any John Doe
for higher sales without

having the ability to


collect money from them
Creation of value
for shareholders
5
from the profits
retained

Increase in Mcap
in last 10 yrs. >
Retained profits
in last 10 yrs.

Otherwise company is
destroying wealth of
shareholders

MANAGEMENT ANALYSIS
A) Subjective parameters
Background
check of
1
promoters &
directors
Management
2
succession plans

Web search

Good succession
plan should be in
place

There should not be any


information questioning
the integrity of promoters
& directors
Salary being paid to
potential successors
should be in line with their
experience

B) Objective Parameters
Salary of
3 promoters vs. net
profits

Project execution
skills

promoter should not have


a history of seeking
increase in remuneration
when the profits of the
company declined in past
Company should have
shown good project
execution skills with cost
Green/brownfield and time overruns.
project execution
No salary
increase with
declining
profits/losses

Exclude capacity increase


by mergers & acquisitions.
Consistent
increase in
5
dividend
payments
Promoter
6
shareholding
7

Promoter buying
the shares

8 FII shareholding

Dividend CAGR
>0

Dividends should be
increasing with increase in
profits of the company

> 51%

Higher the better

Insider buying
++
~ 0%

If promoter of a company
buys its shares, investors
should buy too
the lower the better

OTHER BUSINESS PARAMETERS


Company should be either
a pure play (only one
business segment) or
related products. Pure play
model ensures that the
management is specialized
in what they are doing.
1

Product
diversification

2 Govt. influence

Pure play

No govt.
interference in
profit making

Entirely different
unrelated
products/services are a
strict NO. An investor
should rather buy stocks
of different companies, if
she wants such
diversification.
No cap on profit returns or
pricing of product.
No compulsion to supply
to certain clients.

Margin of Safety
MoS in Purchase Price

MoS in Business
Model

Earnings Yield
(EY)
Self Sustainable
Growth Rate
(SSGR)

EY > 10 Yr GSec Yield


SSGR >
Achieved Sales
Growth Rate

Free Cash Flow


(FCF)

FCF/CFO >> 0

Higher the EY than 10 Yr


G-Sec Yield, the better
Higher the SSGR than
achieved Sales Growth,
the better
Higher the FCF as
proportion of CFO, the
better

Credit Rating
Current credit rating
should be minimum BBB1

Credit Rating
History

BBB- & above

Credit rating should have


been improving over the
years

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