Investment checklist questions

Investment checklist questions

Let’s begin with the six areas of due diligence. This is your investment checklist. It is the best way to begin understanding the gaps in your investment process. Or your investment ideas.

Here’s the secret: no one knows everything. There is always an unknown unknown. There are even known unknowns. The trick is to increase your certainty level of investing. This requires small improvements, week over week.

Understanding the Business—The Basics

  • Do I want to spend a lot of time learning about this business?
  • How would you evaluate this business if you were to become its CEO?
  • Can you describe how the business operates, in your own words?
  • How does the business make money?
  • How has the business evolved over time?
  • In what foreign markets does the business operate, and what are the risks of operating in these countries?

Understanding the Business—from the Customer Perspective

  • Who is the core customer of the business?
  • Is the customer base concentrated or diversified?
  • Is it easy or difficult to convince customers to buy the products or services?
  • What is the customer retention rate for the business?
  • What are the signs a business is customer oriented?
  • What pain does the business alleviate for the customer?
  • To what degree is the customer dependent on the products or services from the business?
  • If the business disappeared tomorrow, what impact would this have on the customer base?

Evaluating the Strengths and Weaknesses of a Business and Industry

  • Does the business have a sustainable competitive advantage and what is its source?
  • Does the business possess the ability to raise prices without losing customers?
  • Does the business operate in a good or bad industry?
  • How has the industry evolved over time?
  • What is the competitive landscape, and how intense is the competition?
  • What type of relationship does the business have with its suppliers?

Measuring the Operating and Financial Health of the Business

  • What are the fundamentals of the business?
  • What are the operating metrics of the business that you need to monitor?
  • What are the key risks the business faces?
  • How does inflation affect the business?
  • Is the business’s balance sheet strong or weak?
  • What is the return on invested capital for the business?

Evaluating the Distribution of Earnings (Cash Flows)

  • Are the accounting standards that management uses conservative or liberal?
  • Does the business generate revenues that are recurring or from one- off transactions?
  • To what degree is the business cyclical, countercyclical, or recession-resistant?
  • To what degree does operating leverage impact the earnings of the business?
  • How does working capital impact the cash flows of the business?
  • Does the business have high or low capital- expenditure requirements?

Assessing the Quality of Management—Background and Classification: Who Are They?

  • What type of manager is leading the company?
  • What are the effects on the business of bringing in outside management?
  • Is the manager a lion or a hyena?
  • How did the manager rise to lead the business?
  • How are senior managers compensated, and how did they gain their ownership interest?
  • Have the managers been buying or selling the stock?

Assessing the Quality of Management—Competence: How Management Operates the Business

  • Does the CEO manage the business to benefit all stakeholders?
  • Does the management team improve its operations day- to- day or does it use a strategic plan to conduct its business?
  • Do the CEO and CFO issue guidance regarding earnings?
  • Is the business managed in a centralized or decentralized way?
  • Does management value its employees?
  • Does the management team know how to hire well?
  • Does the management team focus on cutting unnecessary costs?
  • Are the CEO and CFO disciplined in making capital- allocation decisions?
  • Do the CEO and CFO buy back stock opportunistically?

Assessing the Quality of Management—Positive and Negative Traits

  • Does the CEO love the money or the business?
  • Can you identify a moment of integrity for the manager?
  • Are managers clear and consistent in their communications and actions with stakeholders?
  • Does management think independently and remain unswayed by what others in their industry are doing?
  • Is the CEO self-promoting?

Evaluating Growth Opportunities

  • Does the business grow through mergers and acquisitions, or does it grow organically?
  • What is the management team’s motivation to grow the business?
  • Has historical growth been profitable and will it continue?
  • What are the future growth prospects for the business?
  • Is the management team growing the business too quickly or at a steady pace?

Evaluating Mergers & Acquisitions

  • How does management make M&A decisions?
  • Have past acquisitions been successful?

Industry Checklist

  1. Geographic Area – International and Domestic
  2. Industry – Size, Trends, Outlook
  3. Products & Services
  4. Buyers – Target Customers
  5. Regulatory Environment
  6. Company Information – identify and research most successful businesses
  7. Analyze Competitive Forces
  8. Threat of New Entrants – Barriers to Entry
  9. Power of Suppliers
  10. Power of Buyers
  11. Availability of Substitutes
  12. Competitive Rivalry
  13. Understand Tax, Accounting, and Legal Laws
Back to blog