How to Quickly Analysis Any Company - My 10-Point Checklist

Mar 13, 2025

In the earlier post, we looked at different criteria to use to filter out the companies we would like to do further research on.

As I said, I typically use the following criteria:

Sales > Rs 100 crore.
Sales growth over the last 10 years > 10% CAGR.
Earnings Growth over the last 10 years > 15% CAGR
Cumulative CFO for last 10 years > 85% of Cumulative PAT for the last 10 years
Debt to equity ratio < 1
Interest Coverage ratio > 4
Average ROE over the last 10 years > 15%

With these parameters, you can actively search for companies that have shown strong sales and profit growth in the past and have the business strength to continue growing in the future.

Now, you should ideally look for companies whose shares are trading at relatively low valuations, which provides a significant margin of safety.

But many great companies typically trade at valuations that seem expensive.

That's why I don’t usually include valuation parameters when I filter out companies.

The idea behind this is that I want to know all the great companies in India, regardless of their current valuation. It may be that in the future, due to a general market crash or a particular event, an expensive company becomes available at a good price. And if that is the case, I want to be ready with my analysis and conviction.

One more thing…

If a company's profits rise, its share price will likely rise too. However, no one can predict the timing of this increase, which entails a certain degree of uncertainty. This uncertainty requires patience. If you stay invested in good companies, it can pay off over time.

Now, analysis of any company basically involves the following four main sections:

Financial Analysis,
Business Analysis,
Management Analysis, and finally
Valuation Analysis

There's no specific order that you need to follow, but you must cover all four areas comprehensively.

But before we dive into detailed analysis, understand that there are over 5,000 companies listed on Indian stock exchanges, and most won’t meet your criteria. There’s a ton of data to sift through in each section, and there’s no shortage of reading and research before you reach a solid conclusion. But the thing is—you’ve got a full-time job and only a few hours a day to evaluate companies. So, you need a smart, structured approach to process all this information efficiently and figure out if a company is even worth your time.

And for this, I strongly suggest researching in a reverse order, i.e. inverting the problem.

Start by looking for reasons to reject a company rather than reasons to invest in it. Keep going back until you can’t find a solid reason to say no. This way, you save time by avoiding deep analysis on companies that don’t meet your basic criteria.

For example, I prefer not to invest in companies where promoters hold less than a 50% stake. I believe they should have enough skin in the game to stay committed. Some may find this too strict, but it makes my decision-making easier. Similarly, I avoid companies with questionable related-party transactions or poor capital allocation—something that becomes clear through a funds flow analysis.

I’ll talk about this simple yet extremely effective technique in a while.

I start by analyzing data that can be evaluated objectively, allowing me to draw initial conclusions with clarity.

While a complete analysis involves looking at 1. Financials, 2. Business & Industry, 3. Management, and 4. Valuation, I break it down into two main sections:

Quantitative Analysis – Where numbers do the talking.
Qualitative Analysis – Where judgment and insights come into play.

I start by reviewing all the available quantitative data—the numbers I can plug into Excel and analyze within 10 minutes. This gives me a quick, objective snapshot of the company.

If the company clears this first check, I move on to deeper research, looking for data that isn’t readily available, like related party transactions.

The key is to have a rejection checklist and analyze companies in reverse order—eliminating weak candidates early. This way, I save a ton of time and focus only on the most promising ones.

So, I’ve created a 10-Point Checklist to Narrow Down Potential Companies.

Some of the points in this checklist will already be covered if you use the screening filters I mentioned earlier. But I’ve created this checklist assuming you aren’t using any filters.

Many times, you’ll hear about a stock from friends, family, colleagues, or online sources. When that happens, you need a quick way to analyze the company and decide if it’s worth your time.

Keeping this in mind, let’s look at the10-Point Checklist to analyse any stock:

1. Does the company pass a minimum quality hurdle?

The first step in our assessment is to avoid the following types of companies:

A. Avoid companies with very low market capitalizations.

B. Avoid companies that have poor performance and low-quality accounting hygiene. We will talk about this in detail later on.

C. Preferably avoid foreign companies that are difficult to get detailed information about or regions where you're not as familiar with the business landscape and regulations.

As you are a small investor with limited means, there is no point trying to be a daredevil and invest in a company outside your circle of familiarity just for the sake of diversification or great prospects. You will have ample opportunities to make handsome money in the area where you live. Just in case, you want geographical diversification, preferably do it through high-quality mutual fund schemes that invest overseas.

D. Avoid IPOs. They are mostly not worth your attention. We have discussed this before in fatal investment myths. Just to recap, companies usually go public when they think they can get high prices. So, IPOs are rarely bargains. Also, most IPOs are young and inexperienced companies with very limited track records. So, it’s best to avoid them as a general rule.

Alright, now let’s move on to the next point.

2. Has the company ever made an operating profit?

This test may seem simple, but it's remarkably effective and it will keep you away from potential bad companies.

And that is one big achievement.

Now read on very carefully...

Often, companies that lose money in the early stages sound incredibly enticing because such companies are usually researching breakthroughs or are on the verge of launching innovative products or services that seem revolutionary.

Unfortunately, such companies are more likely to cause significant losses in your investment portfolio than to provide you with whopping profits.

And the reason is the base rate.

What is base rate?

You can define Base rate as Success ratio as % of total attempts.

While you hear only the success stories, you don’t come across thousands of companies that fail along the way.

From a probability standpoint, you are more likely to invest in a company that will fail in the future, even if it was the one that introduced a groundbreaking product.

Building a revolutionary product and building a highly profitable and formidable company are two different things.

As investors, we need to invest in a company that is highly profitable and equally difficult to compete with. That’s how you’ll make money from your investment.

In a nutshell, the success rate of early-stage unproven companies is quite low and you are better off avoiding them.

Alright, now let’s move on to the next point.

3. Are returns on invested capital consistently good with only minimal or optimum leverage?

Now ROCE should be your first key filter while hunting for moats.

Return on capital employed (ROCE) of more than 15% for most of the past 10 years is a great filter to begin with.

Why should ROCE be at least 15%?

Well, this is because the overall weighted average cost of capital (WACC) for Indian private companies is around 14%.

A company must exceed that benchmark. In fact, its ROCE should be much higher than the minimum requirement to generate strong free cash flow. This is because a company can create more cash only if its ROCE is well above its WACC. It can then reinvest this excess cash at a high ROCE, fueling further growth.

Only this way a company can become a compound interest machine.

It is also equally important that the company you are analysing should be able to achieve this target of ROCE of over 15% with as little leverage as possible. While optimum leverage boosts the return of any company, it's best if the company is debt-free and still growing strong.

To value a financial company, you should use a return on equity (ROE) of at least 15% for the last 5 years. This long period of high ROE indicates consistently strong performance by these companies.

4. What does ROE (Return on Equity) and DuPont Analysis tell you?

ROE is a company's ability to generate returns for its shareholders. A high ROE is usually a sign of the effective use of equity and debt.

But here you need to dig a little deeper.

You need to compare these numbers with competitors and non-competitors to assess relative performance and you also need to do a Du-Pont Analysis to figure out the real source of high ROE numbers. If good numbers are because of the high asset Turnover and profit margins, it’s a good sign. But if it is because of a lot of debt, it’s a bad sign.

A) Asset Turnover and Sales: A higher turnover rate indicates effective use of resources. Now, in this, examine how the company's revenue and asset turnover have evolved over time and compare these metrics to the industry average. This will tell you whether the company is using its assets efficiently to generate more revenue.

b) Profitability: Check how the company's gross, EBITDA and EBIT margins have evolved over the years, whether they have improved or stalled or have declined. This will let you know whether the company has maintained its prices effectively and controlled costs.

c) Leverage: Finally, calculate the company's debt-to-equity ratio. If it's decreasing over time, it's a positive sign. Compare this ratio to the industry average. Companies that have little or no debt are often in a stronger position because they don't rely too heavily on borrowed funds.

Examine whether the company's debt has been increasing or decreasing as a percentage of total assets. If they are not decreasing, or even worse, increasing and are now above D/E of 1, that is a red flag. Stay away from such companies.

If the company nonetheless has reasonable debt, make sure to take a closer look at the debt. If you find complex or questionable debt instruments in the company's financial reports that you can't fully grasp, better move on to other prospects. There are plenty of well-managed companies with simpler and more transparent capital structures to consider.

PAT (Profit after Taxes): Analyse whether the company's profit after taxes is increasing. Also, assess the trend in net margins – whether they're stable, increasing or decreasing. Rising profits or high and stable margins are good indicators of financial health.

Now that you have understood ROE and its sources, let’s look at the next point.

5. Are sales and Earnings Growth Consistent or Erratic?

You must analyse the company’s sales and earnings growth, how it has achieved that growth and how stable, increasing or declining it has been over the past few years. The top-performing companies typically demonstrate steady and consistent growth rates over time. However, if a company's earnings fluctuate unpredictably, it possibly operates in an extremely volatile industry or is facing regular challenges from competitors. Both are not great signs for your investment prospects. So, if a company has been able to deliver stable and/or improving margins, it’s a good sign for us. If not, give the company a pass.

6. Is the company’s Balance Sheet robust?

This point checks a company’s resilience. Here are some key considerations:

Lower and nil debt are better than a company loaded with debt, even if the latter is performing better than the first one. Firms with substantial debt require extra scrutiny because their capital structures can be quite complex.

If a non-bank company has a financial leverage ratio above 4 or a debt-to-equity ratio over 1.0, it is better to leave the company alone, unless it is actively working on reducing that debt.

In such cases, only the intent of the management to curb debt is not important. There has to be a demonstrated proof for the same.

So, low to no debt; great. If you see a lot of debt, pass the company.

7. Is the company generating consistent cash flow from operations and is profits on the P&L are getting converted to cash?

Now understand that fast-growing companies may report profits in the income statement before they could show cash flows on the cash flow statement.

But ultimately, every company must generate cash. Companies that report negative cash flows from operations will eventually need to secure additional funds, either through borrowings or by issuing more shares. Similarly, companies whose cash flows are much lower than the profits shown on the profit and loss statement will also need additional capital for growth, as their internal engine of cash flow generation is not strong.

Both borrowings and equity dilution are not great options for you.

Borrowing increases the company's fixed costs while issuing more shares dilutes your ownership stake as a shareholder. So, as a common investor, avoid companies that don't generate positive cash flow.

There are plenty of high-growth cash-flow-generating companies that you can invest in.

8. Is the company generating Free Cash Flows?

Indeed, free cash flow is often referred to as the "holy grail" of financial ratios because it represents the cash a company generates after accounting for capital expenditures.

This is the cash that truly adds value to the business.

When evaluating companies, it's usually better to invest in companies that generate free cash flow than those that don't.

So, the first step is to find out if a company has a positive CFO in the long run.

If a company is CFO positive, check if it also has a positive in terms of free cash flow.

We will talk about how to calculate free cash flows later on.

There is one important exception here that I’d like to point out.

Some growth companies reinvest all of their free cash flow back into the business to take advantage of growth opportunities and achieve an excellent return on capital employed (ROCE) on that reinvested capital. In such cases, free cash flow may appear lower or even negative. This is acceptable as long as the company has good prospects for reinvestment and has a proven track record of using these funds effectively.

Okay, next point...

9. Does promoter have skin in the game? Has the promoter shareholding remained largely same over the past several years?

When you evaluate a company, check if the promoters have enough skin in the game. I expect promoters to have at least a 50% stake in the company you are analyzing. A significant ownership stake usually indicates that the promoters are committed to the long-term success of the company. This commitment can translate into more strategic and sustainable decision-making.

Also, pay close attention to whether the number of shares outstanding has increased significantly in recent years or not.

Here are the key considerations regarding outstanding shares:

New Share Issuance to acquire other companies: If the company has issued new shares to acquire other companies, this can be a red flag. Most acquisitions do not result in favourable outcomes, and this strategy may not be in the best interest of shareholders.

Stock Options: Granting numerous options to employees and executives also leads to an increase in shares outstanding. This is usually unfavourable for investors because it means that your stake in the company gradually decreases as these options are exercised.

Continuous increase: If the shares outstanding are consistently increasing by around 2% or more a year without any major acquisitions, you should think twice about investing in such a company.

Share buybacks: On the other hand, if the company actively buys back shares and the number of shares falls, this can be a positive sign, depending on why the management is buying back shares. If the company is buying back shares to offset the impact of huge ESOPs exercised by management at horrendous prices, it is doing so at the expense of existing shareholders who have decided to stay in the company and not offer their shares for buyback. This is bad. On the other hand, if the company buys back shares because it believes that the shares are undervalued, that is a good sign.

So be cautious here.

If the company is aggressively buying back shares even though the stock price continues to rise significantly, it’s a warning sign and the company is probably just buying back shares to neutralise millions of shares it has granted to top management in the form of options.

Honestly, this is just an insidious and indirect way to transfer shareholders’ money to top management.

Share buybacks make sense from a financial perspective only if the company's shares are trading at a reasonable valuation.

Avoid companies that buy back their own overvalued stock, just as you would avoid investing in overvalued shares.

Moving on to the next point; this point is not really quantitative and you will need to do a little bit more work here.

10. Are the industry dynamics stable/favourble?

The more stable the industry dynamics, the better it is.

Keep in mind that rapid changes/evolution in the industry may be good for consumers, but not for your investment prospects.

Rapid changes also mean shifts in a company's competitive advantage. As an investor, you should look for companies that can sustain their edge over competitors for a long time.

Incidentally, how much debt a company can comfortably service depends crucially on how stable the sector in which it operates is.

Defensive industries like consumer products can generally tolerate more leverage compared to those with volatile earnings, such as economically sensitive and cyclical sectors. Companies in cyclical industries should ideally have lower debt that can be easily managed even during the downturn.

Ironically, you will often find that the opposite is the case. (One more reason to stay away from cyclical companies)

Also, keep the following points in mind:

Don't rule out an entire industry just because it appears to be commodity-driven or subject to cyclical trends. Instead, focus on companies that consistently generate high returns on capital, regardless of the industry to which they belong and the characteristics of the industry as a whole. Dive deeper into research to discover hidden gems, such as niche players that have managed to build robust moats even in highly competitive or overlooked markets.

For instance, these niche providers, even if they operate in unattractive industries, may have embedded themselves deeply into their customers' operations, making it undesirable for them to switch to the competition. Or their products offer such high quality or precision that customers wouldn't even consider switching to lower-cost alternatives.

Also, don't discount seemingly boring or traditional companies. Many of these "boring" old economy companies, such as gas pipelines, can have excellent structural moats that consistently generate high profits. For investors willing to think outside the box, these opportunities can be valuable.

While the moat of any company keeps on widening or narrowing each day with the changing business landscape, industries and companies operating within that industry are generally sticky. Most struggling companies continue to struggle unless their competitive position or operational efficiency changes significantly. Therefore, you should consider such companies with a pinch of salt and thoroughly evaluate the likelihood of significant positive change before investing.

Today's winners may be tomorrow's losers, but it's unlikely that today's losers will be tomorrow's winners.

I hope now you know how to quickly analyse any company and see if it is likely to have any meaningful growth potential and robust competitive advantages that will allow it to exploit that growth potential.

Let me summarise the points for you: