Investment Evaluation Checklist

1. Initial Screening

• Is the business within your circle of competence?
• Can you explain the business model in one sentence?
• Does the company operate in a stable or growing industry?
• Is the industry free from significant regulatory uncertainty?
• Is the business resilient to economic cycles?

2. Financial Health and Performance

• Calculate and assess: EBIT/EV ratio
• Calculate and assess: Normalized EBIT/(NWC + Net Equipment) ratio
• Review debt levels: Is the balance sheet healthy?
• Analyze free cash flow generation over the past 5 years
• Calculate owner earnings (adjusted free cash flow)

3. Company’s Competitive Position

• Identify the company’s primary competitive advantage (moat)
• Assess the company’s market share within its industry
• Evaluate the company’s pricing power: Strong, Moderate, or Weak?
• Analyze the company’s brand strength or customer loyalty
• Review the company’s operational efficiency compared to peers

4. Industry Competitive Landscape

• Threat of new entrants: High, Medium, or Low?
• Threat of substitute products or services: High, Medium, or Low?
• Bargaining power of customers (buyers): High, Medium, or Low?
• Bargaining power of suppliers: High, Medium, or Low?
• Intensity of competitive rivalry: High, Medium, or Low?

5. Management Quality

• Verify management’s ownership stake
• Review past shareholder communications for honesty
• Assess capital allocation decisions over the past 3-5 years
• Check for any history of unprofitable expansions or acquisitions
• Evaluate the use of excess cash (e.g., dividends, buybacks)

6. Growth Prospects

• Project normalized EBIT for the next 3 years
• Identify specific growth opportunities or new markets
• Assess alignment with long-term industry trends
• Evaluate the scalability of the current business model
• Review the company’s R&D or innovation pipeline

7. Risks and Valuation

• List top 3 risks that could significantly impact the business
• Calculate the margin of safety in the current stock price
• Compare key valuation multiples to industry peers
• Review accounting practices for any red flags
• Assess your comfort level with a 5-10 year holding period

Final Assessment

• Does this investment improve portfolio diversification?
• Rate your confidence in the business (1-10 scale)
• Is the potential return worth the identified risks?
• How does this investment fit with your overall investment strategy?
• Make a final decision: Invest, Watch, or Pass

Action: Discuss findings with your investment team. Document your analysis for each section to support your final decision.