Following is the research framework I follow to arrive at an investment decision. Though the below is mostly a high level framework, I try and keep tweaking it based on the industry/ company whenever required. The objective is to identify companies which will make substantial return for an investor over a very long period of time.
Understanding the company, its products, and the future
Deep understanding of various products/ services offered by the company
How does the company distinguish itself from other players
What does the company do differently and how sustainable is it
What is the general need of the product/ service in the long term, will there be significant disruptions which can impact the company
Can the company disrupt and is the company working towards changes in the industry to cater to the changes in landscape
Understanding the industry landscape and seeing how the company fits in it
How does the global industry look – who are the key players and countries
What is the expected industry CAGR
How does the Indian industry look – key players and sizes
Market share of the company
Industry CAGR
Do you think the company can outperform the industry growth
Do players have pricing power, what is required for players to have that pricing power
What are the various expansion plans of peers, is there going to be over supply or constrained supply in future
Is the company planning to go through a capacity expansion – will that help the company grow or can it be dangerous as the demand is stagnating
Understanding the management and the mind of management
How old is the management with the company
What is their experience level and how long have they been in the company
Are their goals and incentives aligned with the company – Salary, commissions, incentives, Shareholding, skin the game
Is there any related party transactions or contingent liabilities which can lead to big surprises in future
Have the management/ company ever been in news for wrong reasons?
How institutionalized is the company? What is the succession planning?
Annual reports – management discussion and views and the plans to take the business further
Various events where the management suggests how they plan to take the company to the next level.
Ground research, feedback from various touch points
Meeting various stakeholders – customers, clients, dealers, distributors and understanding their feedback
Understanding ex-employee feedback on the management and professionalism, focus and vision
Feedback from clients, customers on various surveys / forums
Glassdoor and other employee forum reviews
Uniqueness of the company, sustainability of the business and the model
How is the production division compared to peers
How much does company spend on R&D and its effectiveness – patents, new products
What does the company do better than the rest, how is the sales and marketing team orientation
How is the service element of the company, does the company spend enough time and energy to ensure top notch customer/ client relationships and engagements
Follow the company on all the social media to keep seeing what they communicate externally
History and navigation during changes
How has the company done during various major past events – global financial crisis, covid crisis, other major events which affected the relevant industry
How does the management navigate difficult industry landscape and changes – do they innovate, do they consolidate or do they go through excessive turmoil
How has the company communicated in the past with various stakeholders – do they fulfil most promises made in annual reports and conference calls, other meetings
Does the company emerge stronger after crisis – do you think the company gets an advantage when there is consolidation in the industry
Value chain, supply chain and peer comparisons
How does the company manage its supply chain
Are there any weak areas or products which can disturb the profitability or revenue growth of the company
Does the company have pricing power as well as negotiating power with clients as well as vendors
Is there any vertical / horizontal integration which may help the company
Compare the company with its peers to identify the strengths and weaknesses
Does the company outperform the peers in growth, profitability, supply chain, capital efficiency, solvency or return on capital parameters
Does the company have significantly higher advantage over peers which can be explained through the financial numbers
Investments and focus of the company
Is the company focused on building their business
How focused is the management on execution and growth
What are the key things / projects that the company undertakes to ensure long term sustainability of the business model
How innovative is the company compared to others in the industry – what is the relative innovation required in the industry to keep doing better than peers.
Financials
Looking at every number in the balance sheet, cash flow statement and P/L to understand the profitability, growth, and efficiency of the company.
How does the working capital management for the company look compared to its peers
Explain every large change in the numbers of the key statements and see if they are consistent and make sense.
Zero tolerance for any mis reporting and forensic analysis of all the statements
Understanding drivers for profitability, efficiency, and their ability to stay relevant over the long term
Valuation
Discounted cash flow valuation for the company and evaluating the margin of safety.
The books I highly recommend reading is the Intelligent investor and common stock, uncommon profits by Philip Fisher
