Company Analysis(qualitative) Flashcards
How company can create economic moat?
1) cost advantage due to economies of scale
2) high switching cost
3) Patents
4) Brand recognition
5) Government Licences
6) Excellent Management
7) Unique corporate culture
What is economic moat?
It means ability of business to maintain competitive advantage over its competitors in order to protect its long term profits and market share from rival
How to choose stock based on high economic moat?
1) Consistent earnings even during bad economic times
2) High level of cash in hand
3) Better financial performance compared to competitors in same industry
4) Product dominance in the market
5) Powerful intellectual property
6) High brand recognition
What are signs of durable business?
It has high operating margin and high levels of free cash flow
What to check in promoters or management background?
1) Find who are the promoters of the company or who represents the top management , what is their experience and educational qualifications
2) honesty and integrity of management
3) has the promoters or management is punished or penalised SEBI or other regulators in the past
4) are there any court cases against promoters or management of company
5) is the company in any type of fraud or dispute
What are the key characteristics of good corporate governance?
1) Independent leadership
2) Transparency
3) Accountability
4) Consensus building
5) stake holder relations
6) Proper Frame work
7) Policies in place
Is it better to avoid investing in companies which have corporate governance issues?
Yes especially if they are small or mid cap companies
How to invest based on treatment of minority shareholders?
One should prefer to invest in a company which takes good care of its minority shareholders
How to make investment sign based on dividend payment and dividend yield?
1) If company does not keep adequate reserves(money) for future expansion and pays hefty dividend then it’s a warning sign
2) Any dividend payment in a absence of adequate free cash flow is also a warning sign
How to invest based on promoter’s faith in the business?
1) High promoter’s shareholding(>50%) in a company is a positive sign
2) An increasing shareholding by promoters or management is positive sign
Other important positive sign for promoters faith:
1) Bring in promoter’s children or family members in senior management positions of the company
2) Bringing in professional in senior management positions of the company
3) or mix of two above approaches
What happens to the companies with higher percentage of promoters pledging when market falls?
Suffer( share price might fall) . In severe cases
It also reduces the promoter shareholding in the company , wealth destruction of promoters, reduces their ability to make crucial decisions.
Why promoters pledge shares?
To raise fund
How to invest based on the extent of pledging of shares to promoters?
As thumb rule, to be on safer side , it is better to avoid investing in companies where the promoters have pledged more than 50 to 60% of their shareholding( see in series of quarter )
