Guidance on DYOR

25th Jan '22 by Weedubbya

3 comments 383 reads

As a novice I am trying to think through the process of Doing my own research. I often feel overwhelmed by all of the information available but after reading The Naked trader, I am trying to set out some simple rules to guide me through the process of selecting companies to invest in.

I liked Robbie Burn's illustration of imagining I had billions of pounds to buy a company out right - if so what would I look for?

I would like more experienced investors thoughts, but I have come up with the following things I would like to consider, am I missing any major points ?

What does the company do - do I have a basic understanding of the business?
Who runs the company, do they seem like sensible people?
How much is the company selling for (market cap)?
How much profit does the business make in relation to the market cap? (Robbie Burn's won't pay more than 15x operating)?
Is turnover and profits growing year on year?
If the cost of doing business increases, can these costs be passed onto the customer?
How much debt does the company have? (Robbie Burn's will not buy a shares in a company with debt greater than 3x profits)
How much are the companies assets worth?
Are those who run the company invested in the company and by how much?
What does the company do with the profits? (I don't know how to find that out though)?
When I research the company on line and in the media am I impressed?
And of course what is the Stockrank?

Is that a good start to selecting reasonable companies?

I have lots of other questions about how best to find out all these things, but that's enough for now.

TIA

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Effortless Cool

26th Jan '22

Hi Weedubbya,

That list looks a good starting point. Regarding your point 8, you will find your answer in the cash flow statement, often the poor relation in the financial statements, certainly the hardest to forecast but, in my view, the most useful.

In practice, very broadly, companies can do four things with their profits:

Reinvest them in the business, which you will see in the 'investment activities' section of the cash flow;
Pay them out as dividends, which you will see in the 'financing activities' section of the cash flow;
Pay down debt, which you will see in the 'financing activities' section of the cash flow; or
Hang onto them, which you will see from the 'net increase in cash' at the bottom of the cash flow.

Additionally, the 'operating activities' section of the cash flow can reveal whether the declared profits are real at all (check the 'net cash from operating activities' versus 'operating profits').

Good luck!

Weedubbya

Thanks you (it is point 10 now as I edited to ask another couple of questions). That is very helpful.

welwichia

many thanks for posting this Effortless Cool - this is a really good way to think about relating somewhat abstract share prices to the underlying real business entity. There is perhaps a 5th capital allocation choice management can make: buy back the company's shares in the open market. This is another form of return to shareholders and perhaps more popular in the US. I sometimes see analysts over there lumping dividends + share buybacks into a total "shareholder yield" metric.

The reason I mention this is that I would want something to monitor the trend of the overall number of shares in issue to be part of my checklist - is the company in the habit of continually raising capital by issuing shares or are they buying back and reducing the number of shares in issue?

Guidance on DYOR

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Weedubbya

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