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@jbwhit
Last active July 4, 2024 19:46
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This tweet https://x.com/datarade/status/1808705176179462467 shared a checklist from a summary from https://x.com/sb9721p. I tried to make it into an actual checklist.

Optimized Investment Evaluation Checklist

Purpose: To systematically evaluate potential investments by assessing key financial, operational, and strategic factors.

Date of creation: 2024-07-04

1. Initial Screening

  • Is the business within your circle of competence?
  • Can you explain the business model in one sentence?
  • Does the company operate in a stable or growing industry?
  • Is the industry free from significant regulatory uncertainty?
  • Is the business resilient to economic cycles?

2. Financial Health and Performance

  • Calculate and assess: EBIT/EV ratio
  • Calculate and assess: Normalized EBIT/(NWC + Net Equipment) ratio
  • Review debt levels: Is the balance sheet healthy?
  • Analyze free cash flow generation over the past 5 years
  • Calculate owner earnings (adjusted free cash flow)

3. Company's Competitive Position

  • Identify the company's primary competitive advantage (moat)
  • Assess the company's market share within its industry
  • Evaluate the company's pricing power: Strong, Moderate, or Weak?
  • Analyze the company's brand strength or customer loyalty
  • Review the company's operational efficiency compared to peers

4. Industry Competitive Landscape

  • Threat of new entrants: High, Medium, or Low?
  • Threat of substitute products or services: High, Medium, or Low?
  • Bargaining power of customers (buyers): High, Medium, or Low?
  • Bargaining power of suppliers: High, Medium, or Low?
  • Intensity of competitive rivalry: High, Medium, or Low?

5. Management Quality

  • Verify management's ownership stake
  • Review past shareholder communications for honesty
  • Assess capital allocation decisions over the past 3-5 years
  • Check for any history of unprofitable expansions or acquisitions
  • Evaluate the use of excess cash (e.g., dividends, buybacks)

6. Growth Prospects

  • Project normalized EBIT for the next 3 years
  • Identify specific growth opportunities or new markets
  • Assess alignment with long-term industry trends
  • Evaluate the scalability of the current business model
  • Review the company's R&D or innovation pipeline

7. Risks and Valuation

  • List top 3 risks that could significantly impact the business
  • Calculate the margin of safety in the current stock price
  • Compare key valuation multiples to industry peers
  • Review accounting practices for any red flags
  • Assess your comfort level with a 5-10 year holding period

Final Assessment

  • Does this investment improve portfolio diversification?
  • Rate your confidence in the business (1-10 scale)
  • Is the potential return worth the identified risks?
  • How does this investment fit with your overall investment strategy?
  • Make a final decision: Invest, Watch, or Pass

Action: Discuss findings with your investment team. Document your analysis for each section to support your final decision.

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