What does the company do? Track record? How long has it been in business?
Key products or services? Length of production and distribution cycle?
What is the long term pricing power of the business? What are primary profit drivers? Has this been changing? Are margins improving are degrading? Economies of scale? Product mix shifts? How does the business perform in an inflationary environment?
Who are the customers and are they / will they be changing? Highly concentrated customers or diverse? Local/regional or national/international business? Do customers pay in cash – e.g. McDonald’s or does the company have to wait to get paid? If so, how long? Are customers reliable or is the company having trouble collecting?
Any history of getting stuck with excess inventory? Is inventory perishable, e.g. in technology
companies or fashion retailers
What are the company’s main inputs? Who are the suppliers? What is the cost structure? How much pricing power do suppliers have on the company? What kind of access does the company have to inputs? Any potential limitations in the future? How competitive is the market for the company’s inputs?
What does the company’s cost structure look like? Does it have high fixed costs, such as major investments in manufacturing plants or patents (research and development)? Who controls distribution?
Who are the main competitors and how is the competitive landscape evolving? How stable has market share been for the company and current competitors? Is the industry in a consolidation phase or are more competitors emerging? Is the industry highly competitive with heavy pricing pressures or have margins remained relatively stable? How vulnerable is the business to low cost substitutes – e.g. Chinese players in manufacturing
What are the major (if any) barriers to entry into the market for new competitors? How high are switching costs (if any) for customers? How important is/are the products/services to customers? Does the industry have a single dominant firm structure or are there multiple leaders or is it highly competitive?
What does the regulatory environment look like? How has it changed?
Management – who is running the company and what to they think they are doing? Track record of the team? Who is on the Board of Directors? Stable board? Relationship between the board and the management team? Employee turnover? Is the company an employer of choice?
Company ownership? Who are the major shareholders? Are insiders buying or selling? Any activist shareholders? History of share issuance and debt issuance.
What is driving growth at the company? What are growth rates within business units, e.g. are major areas of growth material to bottom line?
Financial health/track record? Balance sheet/debt/cash flow etc.
Current levels and changes over time to:
- Historical financial performance for the last 10 years: gross margins, EBITDA margins, EBIT margins, ROA, ROIC and ROE
- Debt to capital ratio
- Net cash per share
- Interest coverage ratio
- EBITDA margins over time and relative to competition
- Changes in capital expenditures over time and relative to competition.
- Changes in free cash flow over time and relative to competition
- Dividend history, percent of free cash flow and net income
- Share buybacks
- What is the catalyst for growth or improvement in profitability? Top line growth based on volume or margin expansion?
Is today’s price right? Compare relative to historical norms, competitors and overall industry:
- Dividend yield
- Price to sales
How does this fit into the portfolio? How does it work with other holdings?