Never let a single ratio become the entire investment case.
1. Start with the business
Explain the company in plain language: what it sells, who pays, where revenue comes from, how it reaches customers and what drives demand. If you cannot explain the business simply, stop before analysing ratios.
2. Understand the industry
Map competitors, customers, suppliers, regulation, capacity, cyclicality and structural growth. Ask whether the industry is gaining or losing economic attractiveness.
3. Find the economic engine
Identify the few variables that actually drive earnings: volume, price, mix, utilisation, raw-material costs, employee costs, capacity, market share and capital intensity.
4. Study revenue growth
Look beyond CAGR. Separate organic growth from acquisitions. Where possible distinguish volume growth from price growth. Ask whether growth is repeatable or driven by a temporary event.
5. Study margins
Track gross margin, operating margin and net margin over multiple years. Investigate inflection points rather than simply celebrating a rising percentage.
6. Study returns on capital
ROCE and ROE help connect profits with the resources required to generate them. Review the trend and identify the operational reasons behind changes.
7. Read the balance sheet
Check cash, debt, net debt, working capital, receivables, inventory, payables, leases and major obligations. A growth story that constantly consumes external capital deserves a different analysis from a self-funded compounder.
8. Read the cash-flow statement
Compare operating cash flow with accounting profit. Understand capex and free cash flow. Investigate persistent gaps between profit and cash.
9. Examine earnings quality
Look for exceptional items, tax anomalies, asset sales, capitalised costs, acquisition effects and unusual working-capital movements. The objective is to estimate sustainable economics, not simply repeat reported numbers.
10. Examine management and ownership
Review promoter holding, pledges where disclosed, dilution, related-party transactions, capital allocation, remuneration, acquisitions and material governance disclosures. Treat claims by management as information to evaluate, not conclusions to accept automatically.
11. Understand competitive advantage
Ask what prevents a competitor from copying the economics: cost position, distribution, switching costs, brand, network effects, intellectual property, scale, customer relationships or regulatory position.
12. Value the company
Use the method appropriate to the business. P/E may be useful for some profitable companies; EV/EBITDA can help when capital structure differs; DCF can make assumptions explicit; price-to-book can matter for certain financial businesses.
13. Reverse the valuation
Instead of asking only “is it cheap?”, ask what growth, margin and return assumptions the current price implies. This often exposes optimism that a simple P/E comparison hides.
14. Build the bear case first
List specific ways the thesis can fail: demand decline, margin compression, new competition, regulation, execution delays, customer loss, leverage, dilution or valuation compression. A risk list should describe mechanisms, not vague words like “market risk.”
“Revenue grew 18%” is a fact if sourced. “The company can sustain 18% growth” is an assumption that requires evidence.
15. Create a one-page investment thesis
Write five things: why the business can compound, what the financial evidence says, what the market price assumes, what could go wrong, and what evidence would make you change your mind.
16. Evidence hierarchy
- Primary company filings and exchange disclosures.
- Audited financial statements and annual reports.
- Regulatory filings and official datasets.
- Management commentary, clearly labelled as management commentary.
- Secondary research and media, used for context rather than replacing primary evidence.
17. The final checklist
- ☐ I understand how the company makes money
- ☐ I understand the industry's economics
- ☐ Growth drivers are identified
- ☐ Margins and returns are understood
- ☐ Balance sheet is understood
- ☐ Cash conversion is understood
- ☐ Ownership/governance reviewed
- ☐ Valuation is explicit
- ☐ Bear case is specific
- ☐ Evidence is dated and sourced
- ☐ I know what would change my mind
18. The professional habit
Keep the research point-in-time. Record the date of every important number. Do not use information published later to make an earlier decision look obvious in hindsight.