Question picked from ‘The Warren Buffett Way’ by Robert Hagstrom
Questions on the core business
1. Is the business simple and understandable?
Never invest in a business you do not understand, for you can’t see the future opportunities and challenges before they arise.
2. Does the business have a consistent operating history?
Past performance is no guarantee for future success, but it shows if a business can operate under varying business conditions.
3. Does the business have favourable long term prospects?
‘Sustainable business’ is the key word here. Stay away from companies that operate on trends and fads that can go out-dated in the future. Look for business that can sustain in the long term.
Questions on management quality
4. Is management rational?
Now this is a very important part of an investor’s business analysis. The rationality of the management and its ability to deploy cash in a profitable manner is what separates a good business from a bad one.
5. Is management candid (frank) with its shareholders?
You don’t want to get into a future Enron, right? Look for managers that admit mistakes and take complete responsibility of their actions.
6. Does management resist the institutional imperative?
Institutional imperative is the need for managers to act like their peers, no matter how irrational their actions may seem. Avoid managers who have the tendency to give in to peer pressure.
Questions on financial position
7. What is the return on equity?
As we will understand later, return on equity is one of the most important metric for evaluating the profitability of companies. Earnings can be manipulated, but return on equity will show how worthy a business is.
8. What are the profit margins?
A company that can convert its sales into profits is a successful business. The key is to keep costs at the minimum, and go for higher profits instead of higher market share. Avoid companies with low margins.
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