The article is quite long but it boils
down to that, in spite of strong evidence to the contrary, highly
trained people think its below them to use check-lists as they
know what to do and working through a check-list is an insult to
them.
“But this time he found few takers.
There were various reasons. Some physicians were offended by
the suggestion that they needed check-lists Others had legitimate
doubts about Pronovost’s evidence.”
This was in spite of these findings:
“Within the first three months of the
project, the infection rate in Michigan’s I.C.U.s decreased by
sixty-six per cent.
The typical I.C.U.—including the ones
at Sinai-Grace Hospital—cut its quarterly infection rate to zero.
Michigan’s infection rates fell so
low that its average I.C.U. outperformed ninety per cent of I.C.U.s
nationwide.
In the Keystone Initiative’s first
eighteen months, the hospitals saved an estimated hundred and
seventy-five million dollars in costs and more than fifteen hundred
lives. The successes have been sustained for almost four years,
all because of a stupid little check-list”
All this from a check-list with
steps as simple as “wash hands with soap”
Check-lists work best in a complex
environment where the performing of certain steps are critical. In
flying it is taken as a given that highly trained pilots work through
check-list for virtually every eventuality.
An aeroplane is a complex entity, so is
medical procedures and I want to argue so is investing.
When evaluating a company there are so
many factors that are beyond our control. We however, through
empirical research, do know what increases the probability of us
making profitable investment decisions.
What is important is that we focus on
what we can control in our research and analysis.
As part of my evaluation process I work
through the following check-list:
-
Operating cash flow higher than earnings per share
-
Free Cash Flow/Share higher than dividends paid
-
Debt to equity below 35%
-
Debt less than book value
-
LT debt less than 2 times working capital
-
Pre-tax margins higher than 15%
-
FCF Margin higher than 10%
-
Current asset ratio greater than 1.5
-
Quick ratio greater than 1
-
Growth in EPS
-
Management shareholding (> 10%)
-
Altman Z Score > 3
-
Substantial Dilution?
-
Flow ratio (Good < 1.25, Bad > 3)
-
Management incentives?
-
Are the salaries too high?
-
Bargaining power of suppliers?
-
Is there heavy insider buying?
-
Is there heavy insider selling?
-
Net share buybacks?
-
Is it a low risk business?
-
Is there high uncertainty?
-
Is it in my circle of competence?
-
Is it a good business?
-
Do I like the management? (Operators, capital allocators,
integrity)
-
Is the stock screaming cheap?
-
How capital intensive is the business?
-
High Profitability
-
High Return on Capital
-
Enormous moat
-
Profitable reinvestment
-
Future growth
-
Net share buybacks?
-
Strong cash flow
-
What has management done with the cash?
-
Where is Free Cash Flow invested?
-
Share Buybacks
-
Dividends
-
Reinvested
-
ROE & ROCE
-
Incremental BV growth
I also have an analysis spreadsheet for
companies I have come across through the Magic Screen from Joel
Greenblatt.
For these companies I use these additional check-list
items:
-
Magic formula values any outliers
-
Bubble industry last 7 years
-
Does the cash belong to the company
-
EBIT / Assets > 20%
I have put this check-list together
over a period of more than 20 years and often make changes as I gain
new information and insights.
I do not have a formula that if a
company fails X amount of points on the check-list I do not consider
it.
The check-list however gives me an
indication of what problem areas the company has and where I have to
do further analysis.
Feel free to use the above points in
your analysis process and
let me know if you have any additional
points I can add to the check-list
by clicking here.
