Forget outcome, focus on process and action
Nature of business
- Understandable
Understandable for you, not for your spouse, friend, relative of colleague
- B to B
You should be able to feel and understand the product which is very easy if it is a BtoB product.
- Unavoidable
Cannot avoid even during poor market condition which will ensure continuous sales and profit for the company.
- Repeating purchase
A product that is basic and purchase repeatedly will never gets seriously affected by any marking condition even though poor market may cause small dip in the profit
Sales to Stock price
Stock price won’t grow by itself, in long term, there should be an underlying reason based on which only the stock price must grow
- Sales
Sales for the sake of sales is not important, sales should reflect in profit
- Profit
Just getting profit is not enough. More profit from less capital employed is enough which should reflect in above CoC ie above 15% ROCE
Getting profit randomly is not enough. We need to get it regularly year after year, which shows the need for the product in the market. Yearly 10 percentage growth for last 10 years
- Quality of Profit – ROCE
Good ROCE is not enough, the profit earned on small capital should reflect in cash
- CFO – Having cash that need to be reinvested heavily back in to the business for maintenance expenditure is not enough, we need cash after completing all expenses that can be invested in to new business potential
- FCF
Fair value of any firm is the present value of all expected future cash flows
- MOAT
Moat should be identifiable
Moat should be expanding
Future FCF is protected by moat
- Capital Allocation
Reinvestment Rate
Compounding of Future FCF is protected by capital allocation
Capital allocation should be based on
- Management,
Succession plan
Decentralized decision-making system
Growth of the company comes from
- Untapped existing market
- Increasing market share from competitors
- Increase in the size of the market itself
- Creating new products/service models
- Getting into new businesses
- Backward integration/forward integration
- Better margin
- Cheaper OPEX