If you are a reader of my blog, you know that I am a big believer in checklists because they are an effective and simple way to counter human error, which can be very costly. Here is a checklist from South African value investor Tim du Toit who writes at EuruShareLab. I am posting it because it is well thought out and a provides a good point of departure for developing one’s own list.
1. Operating cash flow higher than earnings per share
2. Free Cash Flow/Share higher than dividends paid
3. Debt to equity below 35%
4. Debt less than book value
5. LT debt less than 2 times working capital
6. Pre-tax margins higher than 15%
7. FCF Margin higher than 10%
8. Current asset ratio greater than 1.5
9. Quick ratio greater than 1
10. Growth in EPS
11. Management shareholding (> 10%)
12. Altman Z Score > 3
13. Substantial Dilution?
14. Flow ratio (Good <> 3)
15. Management incentives?
16. Are the salaries too high?
17. Bargaining power of suppliers?
18. Is there heavy insider buying?
19. Is there heavy insider selling?
20. Net share buybacks?
21. Is it a low risk business?
22. Is there high uncertainty?
23. Is it in my circle of competence?
24. Is it a good business?
25. Do I like the management? (Operators, capital allocators, integrity)
26. Is the stock screaming cheap?
27. How capital intensive is the business?
28. High Profitability
29. High Return on Capital
30. Enormous moat
31. Profitable reinvestment
32. Future growth
33. Net share buybacks?
34. Strong cash flow
35. What has management done with the cash?
36. Where is Free Cash Flow invested? Share buybacks, dividends, reinvested, ROE & ROCE, incremental BV growth