Check List for Research.
Check List for reviewing a stock as a potential Compound Income investment.
- The Business – What does it do, can you understand it, strengths and weaknesses, geographic exposure, sector, growth, cyclical or defensive?
- Size – Market Capitalization / Enterprise Value (EV) > £50m generally for me.
- Turnover – ratio to EV and what trend growth in recent years and forecast for next two years, steady growth or falls if so why?
- Operating Margin – How high and has it been rising or falling and what is driving change, have they been or are they able to cut costs?
- Return on Equity and Return on Capital Employed <5% bad, >10% good, is it a good quality business with an economic moat?
- Earnings – trend growth in recent years and forecasts for next two years, steady or volatile, up or down in trend?
- Dividends – trend growth in recent years and forecasts for next two years, have they been at least maintained and preferably increased.
- Dividend Cover – by earnings and cash flow, >1.5x and >1x ideally.
- Cash Flow - quantum, quality, accounting policies, recurring income or one off's, capital expenditure and working capital requirements, debt interest
- Financial Gearing (Net Debt / Cash) – to equity, to total assets and market capitalization.
- Operational Gearing - typically have high labour costs, heavy capital expenditure, high input or fixed production costs or needing to carry lots of stock.
- Debt to EBITDA – Moody's Aaa - A= 0.9 - 1.7x / Baa-B= 5.1x - 1.5x / Caa - C = 6.3x+
- EBITDA/Interest (Int. Cover) – Moody's Aaa-A 17x-8.2x / Baa-B 5.1x-1.5x / Caa-C 0.3x
- Other Liabilities – such as Operating Leases, purchase commitments, Pension deficits, warranties and earn outs or any other contractual obligations.
- Valuation Metrics – EV/ EBITDA, EBIT/EV, EV/Sales, P/B, P/E, Dividend Yield
- Management - Type (Manager / Empire Builder), capital allocation, share buy backs or issuance, experience, pay, shareholdings, Directors Dealings
- Shareholders - Family ownership? Institutional holders? Directors holdings? Short Interest?
- Share Price Chart - Check three to five year chart for price trend / momentum or any big moves up or down which might require further investigation.
- RNS Announcements - Review recent news and results and check any which coincide with big price moves
- Investor Relations and Company Website - visit these for more information and download Report and Accounts and presentations etc.
This list is not exhaustive, but I find it useful as a starting point for further research and as a way of not missing things when starting to evaluate a stock.