Thread: Putting the stock Analysis framework (own interpretation from the book The Five Rules for Successful Stock Investing by Pat Dorsey suggested by @tapak7 and @contrarianEPS )
1. Do we know what company has been doing last 10-15-20 years? How many friends of yours know the name of the product by this company?
(What's the story of company?)
(What's the story of company?)
2.Gauge Economic Moat:
Look for evidence of an economic moat by examining how profitable this Company has been in the past by analysing Free Cash Flow, Margins, Return on Equity, and Return on Assets
Look for evidence of an economic moat by examining how profitable this Company has been in the past by analysing Free Cash Flow, Margins, Return on Equity, and Return on Assets
2.1 Reading Free Cash Flow
- Is it having a +ve Free Cash Flow for last 10 years? (if yes better otherwise dig deeper)
- Does FCF increase with increasing Revenue? FCF/Sales curve should be growing
- Is it having a +ve Free Cash Flow for last 10 years? (if yes better otherwise dig deeper)
- Does FCF increase with increasing Revenue? FCF/Sales curve should be growing
- If FCF is low(or -ve) , where is the Capex? Is the capex really on forward looking asset?
e.g. FCF for DMART will increase if they stop building new stores, but this will come at a cost of future growth. So, It's very important to understand quality of Capex.
e.g. FCF for DMART will increase if they stop building new stores, but this will come at a cost of future growth. So, It's very important to understand quality of Capex.
- If Quality of Capex is high and that is the reason FCF is not increasing, the business is building its Economic Moat.
2.2 Understanding Margins
- what is the Op. Margin's pattern? Is it widening or narrowing?
- If it is contracting, why? Is it because of temporary phenomen like cyclical metal(RM) price cycle, or any other Macros.
- what is the Op. Margin's pattern? Is it widening or narrowing?
- If it is contracting, why? Is it because of temporary phenomen like cyclical metal(RM) price cycle, or any other Macros.
- Is the Op Margin is increasing? Understand "why". It's a must to understand "why" factor here. Otherwise catching cyclicals at wrong time is not very difficult.
2.3 RoE and RoA
-What's is the pattern for RoE and RoA?
- Is the RoE numbers are skewed due to higher Debt?
-What's is the pattern for RoE and RoA?
- Is the RoE numbers are skewed due to higher Debt?
Few more questions to be answered for assessing economic moat:
- how is the quality of sales in recent past? Is it unsuitable to keep increasing sales this way?
- Correlation between Sales and growth of economy or any other factors
This is my understanding from the chapter.
- how is the quality of sales in recent past? Is it unsuitable to keep increasing sales this way?
- Correlation between Sales and growth of economy or any other factors
This is my understanding from the chapter.
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