This article summarizes the key aspects of stock analysis we have covered so far and presents them in a structured This article summarizes the key aspects of stock analysis we have covered so far and presents them in a structured Final Stock Buying Checklist. Additionally, it addresses important investor questions, such as:
- What to do if no stock meets all checklist criteria?
- How to assign weights to different parameters in the checklist?
This article consolidates all those key parameters into a comprehensive Final Stock Buying Checklist that investors can use before committing their hard-earned savings. It serves as a practical guide for conducting a thorough stock analysis and making informed investment decisions..
Financial Analysis –
| Criteria | Value | Remarks |
| Sales Growth | CAGR>15% for last 7-8 years | Growth should be consistent year on year. Ignore companies where sudden spurt of sales in one year is Confounding the 10 years performance. Very High growth rates of >50% are unsustainable. |
| Profitability | NPM>8% | Look for companies with sustained operating & net profit over the years |
| Tax payout | >25% | Tax rate should be near general corporate tax rate unless some specific tax incentives are applicable to the company. |
| Interest coverage | >3 | |
| Debt to Equity ratio | <0.5 | Look for companies with D/E ratio of as low as possible. Preferably Zero Debt. |
| Current Ratio | >1.25 | |
| Cash flow | CFO>0 | Positive CFO is necessary. It’s great if CFO meets the outflow for CFI and CFF |
| Cumulative PAT vs CFO | cPAT-cCFO | Cumulative PAT and CFO are similar for last 10 years. |
Valuation Analysis:
| Criteria | Value | Remarks |
| P/E ratio | Read: https://intrinsicinfo.com/4-principles-to-decide-the-investable-p-e-ratio-of-a-stock-for-value-investors | Such companies provide good margin of safety |
| P/E to Growth ratio (PEG ratio) | <1 | |
| Earning Yield (EY) | >10 Year G-Sec yield | EY should be greater than long term government bond yields or bank fixed deposit interest rates. |
| P/B ratio | <1 | However, I find P/B ratio irrelevant for section other than financial services. |
| Price to Sales ratio (P/S ratio) | <1.5 | James O’ Shaughnessy: Buy if P/S ratio is 1.5 and Sell if 3. |
| Dividend Yield (DY) | >0% | DY of >5% is very attractive. However do ‘not focus a lot on DY for companies in fast growth phase |
Business & Industry Analysis:
| Criteria | Value | Remarks |
| Companies with Industry Peers | Sales growth>peers | The Company must show sales growth higher than peers. If its sales growth is similar to peers, than there is no Moat. |
| Increase in production capacity and sales volume | Production capacity & sales volume CAGR- Sales CAGR | Company must have shown increased market penetration by selling higher volumes of its product/service. |
| Conversion of sales growth into profit | Profit CAGR-Sales CAGR | A Moat would result in increasing profits with increasing sales. Otherwise, sales growth is only a result of unnecessary expansion or aggressive marketing push, which would erode value in Long term. |
| Conversion of profits into cash | cPAT-cCFO | If cPAT>> cCFO, then either the profits are fictitious or the company is selling to any John Doe the higher sales without having the ability to collect money from them. |
| Creation of value for shareholders from the profits retained | Increase in Mcap in last 10 yrs> Retained profits in last 10 yrs. | Otherwise company is destroying wealth of shareholders |
Management Analysis:
A: Subjective Parameters
| Criteria | Value | Remarks |
| Background check of promoters & directors | Web search | There should not be any information questioning the integrity of parameter & directors. |
| Management Succession plans | Good succession plan should be in place | Salary being paid to potential successors should be in line with their experience |
B: Objective Parameters
| Salary of promoters vs net profits | No Salary increase with declining profits/Losses | Promoter should not have a history of seeking increase in remuneration when the profits of the company declined in past. |
| Project execution skills | Green/Brownfield project execution | Company should have shown good project execution skills with cost and time overruns. Exclude capacity increase by mergers & acquistions |
| Consistent increase in dividend payments | Dividend CAGR>0 | Dividends should be increasing with increasing in profits of the company |
| Promoter shareholding | >51% | Higher the better |
| Promoter buying the shares | Inside buying | If promoter of a company buys its shares, investors should buy too |
| FII Shareholding | 0% | the lower the better |
Other Business Parameters:
| Criteria | Value | Remarks |
| Product Diversification | Pure play | Company should be either a pure play (only one business segment) or related products. Pure play model ensures that the management is specialized in what they are doing. |
| Govt. influence | No govt interference in profit making | No cap on profit returns or pricing of product. No compulsion to supply to certain clients |
Margin of Safety:
| Criteria | Value | Remarks | |
| MOS in Purchase Price | Earning Yield (EY) | EY>10 Yr G- Sec Yield | Higher the EY than 10 Yr |
| MOS in Business Model | Self Sustainable Growth Rate (SSGR) | SSGR>Achieved Sales Growth Rate | Higher the SSGR than achieved Sales Growth the better |
| Free Cash Flow (FCF) | FCF/CFO>>0 | Higher the FCF as proportion of CFO, the better |
Credit Rating Analysis:
| Criteria | Value | Remarks | |
| 1 | Credit Rating History | BBB- & above | Current credit rating should be minimum BBB+ Credit rating should have been improving over the years. |
We have conducted an in-depth fundamental analysis of numerous companies using the parameters outlined in the checklist on our website. You can explore these analyses to enhance your stock evaluation skills.
While no single checklist can guarantee foolproof stock selection, the parameters mentioned above help assess a company’s financial health based on stringent performance criteria. Investors who apply these principles diligently—focusing on strong fundamentals and avoiding overvaluation—can significantly improve their chances of earning solid returns over the long term.
Market fluctuations and business cycles will inevitably impact stock prices and company performance, sometimes causing even well-run firms to face temporary setbacks. However, investors should remain patient and avoid impulsive decisions. As long as a company’s fundamental strength remains intact, staying invested can lead to substantial rewards.
That said, a checklist should serve as a guiding framework, not an absolute rule. Investors should continue learning, refining their criteria, and adjusting their approach as their understanding deepens.
Additionally, monitoring stocks is just as crucial as selecting them. Investors should categorize their monitoring activities into ongoing, quarterly, and annual reviews.
Next, let’s address some common investor questions regarding this checklist and how to use it effectively.
FAQs on Investment Checklist and Stock Valuation
1. What should I do if no company meets all the investment checklist parameters?
It is rare to find a company that perfectly meets all investment criteria. If an investor wishes to relax certain parameters, we recommend maintaining strict standards on financial health, business quality, management, and operational efficiency. The parameter that can be relaxed is valuation. However, investing at a higher valuation (e.g., high P/E ratio) may lower future returns, as stock prices might already be elevated.
To understand the risks involved in investing at high valuations, refer to:
- https://intrinsicinfo.com/why-high-p-e-stocks-can-be-riskier-than-you-think
- https://intrinsicinfo.com/4-principles-to-decide-the-investable-p-e-ratio-of-a-stock-for-value-investors
2. How should I invest in an overvalued market?
In an overvalued market, investors may need to adjust their expectations for future returns but should remain committed to business quality, financial strength, and management integrity. Instead of making investment decisions purely based on market levels like Sensex or Nifty, a more prudent approach is to focus on individual stocks that meet fundamental criteria.
One strategy is to maintain a watchlist of fundamentally strong companies and patiently wait for better entry points. Additionally, evaluating companies based on non-valuation factors can help identify resilient businesses even in a pricey market. To mitigate valuation risks, investors may also consider staggered purchases rather than committing capital all at once.
While high valuations may require some compromises, prioritizing long-term business fundamentals over short-term market fluctuations remains key to successful investing..
3. What if I cannot find a single company that meets my checklist criteria using Screener?
If applying the checklist filters in Screener.in results in no companies, try adjusting the parameters gradually while ensuring they still align with your investment philosophy.
For better screening techniques, refer to:
4. How should I decide whether to buy, hold, or sell a stock in my portfolio?
Buying and holding decisions should be evaluated separately.
Selling Decision: Consider selling if business fundamentals deteriorate or valuations become unsustainably high.
Buying Decision: Based on fundamental analysis, valuation, and margin of safety.
Holding Decision: As long as the company’s fundamentals remain intact, we prefer holding the stock, even at a higher valuation.
For more insights on valuation:
5. Should my valuation approach be different for buying a new stock vs. holding an existing stock?
Yes, the criteria for buying and holding stocks are different. When investing, the focus is on acquiring fundamentally strong stocks at a reasonable valuation. However, once a stock is in the portfolio, the decision to hold is based on the strength of its fundamentals rather than price movements. Even if the stock price rises significantly, we continue holding it as long as the underlying business remains strong.
6. How can I determine if a high-quality stock still has upside potential?
To assess future growth potential, consider:
- Industry growth trends
- Competitive positioning
- Self-sustainable growth rate (SSGR) vs. sales growth rate
- Capex vs. free cash flow (FCF)
If these indicators are favorable, paying a premium for a high-quality stock might still be justified
7. Can a stock selection checklist guarantee success?
No single checklist can be 100% foolproof. However, our checklist helps investors assess companies based on stringent performance parameters. If a stock meets these criteria, it likely has strong fundamentals and is available at a reasonable valuation.
8. How can an investor improve their stock-picking skills?
Investors should:
✅ Apply fundamental analysis using structured checklists
✅ Read case studies and company analyses
✅ Continuously refine their criteria based on experience
✅ Avoid overpaying for stocks, even if the company looks promising
9. What if a stock I invested in starts declining due to market fluctuations?
Market cycles cause temporary stock price fluctuations. Even strong companies may face short-term declines in sales and profitability. The key is to:
✔ Stay patient and avoid emotional decisions
✔ Monitor the company’s business fundamentals
✔ Hold the stock as long as its long-term growth prospects remain intact
10. Should I strictly follow the given checklist or customize it?
Investment checklists serve as guidelines, not rigid rules. Investors should:
🔹 Continuously learn and adapt their stock-picking approach
🔹 Add/remove parameters as they gain more experience
🔹 Modify the checklist to suit their personal investing style
11. How should I monitor stocks in my portfolio?
Stock monitoring is just as important as stock selection. Investors should divide their monitoring process into:
📌 Ongoing activities – Regular updates on news, industry trends
📌 Quarterly reviews – Checking financial results, earnings reports
📌 Annual evaluations – Assessing management performance and long-term growth
For detailed guidance, check:
👉 https://intrinsicinfo.com/optimal-portfolio-size-how-many-stocks-should-you-own
12. What’s next after understanding the checklist?
We will now address common investor queries regarding the practical application of the checklist. Stay tuned for deeper insights.
13. When should an investor accumulate more of an existing stock?
Each buy decision should be independent of previous purchase prices. An investor can accumulate more shares of an already owned stock if:
- The fundamentals remain strong.
- The stock still offers a reasonable margin of safety.
- Interest rates have declined, making higher P/E ratios more justifiable.
14. Should one wait for market corrections before investing?
Waiting for a bear market to invest may not be the best strategy. We advise investing whenever fundamentally strong stocks are available within a reasonable buy range, irrespective of market levels.
15. Should I invest in a lump sum or stagger my investments?
Investment strategy depends on risk appetite and market conditions:
- Lump Sum: Recommended when a strong opportunity is identified.
- Staggered Investing: Helps mitigate risks in volatile or overvalued markets.
Peter Mallouk’s studies suggest investing the entire amount at once maximizes returns, but personal risk tolerance should guide the final decision.
FAQs: Investors’ Queries on the Checklist for Buying Stocks
1. Why is the minimum Net Profit Margin (NPM) rate set at 8%? Does it correlate with 15% sales growth?
Author’s Response: There is no direct correlation. These levels are chosen based on personal preference and investment strategy. Investors should develop their own criteria and adjust parameters as per their comfort level.
2. How should investors weight different checklist parameters when selecting stocks?
Author’s Response: All parameters are equally important, and no single criterion outweighs the others. Investors should aim to find stocks that meet all parameters rather than ignoring certain aspects. Over time, investors may develop their own criteria based on experience.
3. Can only a few financial ratios predict future stock performance?
Author’s Response: No single ratio can accurately predict stock performance. Multiple parameters should be used together to get a comprehensive view of a company’s financial health. Market valuation factors also influence stock price movements.
4. Should we avoid a stock that has recently increased in price significantly?
Author’s Response: A stock’s past price movement is irrelevant if it is still fundamentally strong and available at a reasonable valuation. Stock prices have no ceiling.
5. Is it too late to invest in a stock after analyzing 10 years of financial data?
Author’s Response: A 10-year history provides valuable insights into management decisions and business cycles. If the stock is still within a reasonable valuation range, it is never too late to invest.
6. Does high FII shareholding indicate a safe investment?
Author’s Response: Not necessarily. While FIIs conduct extensive research, retail investors should not rely solely on their participation. Conducting independent research is crucial for making informed decisions.
7. Is diversification within a company beneficial for investors?
Author’s Response: While business diversification can provide stability, analyzing multi-business companies is complex. Investors may find it simpler to diversify by investing in multiple pure-play companies.
8. How should investors approach declining stock prices and poor business performance?
Author’s Response: If a company’s problems are temporary and not due to poor management, it can be a buying opportunity. Investors should assess whether the downturn is industry-wide or company-specific before deciding.
9. Is there a separate checklist for cyclical businesses?
Author’s Response: No separate checklist is used for cyclical stocks. Fundamentally sound and conservatively financed stocks should be held through business cycles for long-term gains.
10. Should investors consider low-growth or governance-challenged companies?
Author’s Response: We do not recommend investing in companies with low growth or governance issues, regardless of valuation. Instead, investors should focus on companies with a consistent 15%+ growth rate, strong management, and a reasonable P/E ratio.
