8 Steps for Business Screening for Value Investing Approach

8 Steps for Business Screening for Value Investing Approach

1) Consistent historical sales & profits growth (minimum 10% yoy for profits, 5% year on year for sales) - Use the Share Investment Guide or Annual Reports for this screen.

2) Consistent high Return on Equity (> 15%, min 10%) - Use the Share Investment Guide or Annual Reports for this screen.

3) Net cash position or low debt ( less than a single year net operating cash flow) - Use the Annual reports. Check 1 year's operating cash flow vs total debt.

4) Business model is easy to understand. Read through the Annual reports and ensure that the business model can be understood from our perspective.

5) Management has integrity and is open, honest and fair towards minority shareholders. Ensure that observable actions are above board, and preferably get in contact with top management for a sense. Does not take any actions that only favour the top management(eg.Getting an excessive salary as compared to peers in the industry)

6) Management displays intelligent asset allocation behaviour. The profits and cash obtained are intelligently ploughed back into the business. Some examples would include avoiding expensive acquisitions to expand, a sound dividend policy that allows cash for shareholders and enough for expansion.

7) Industry Sector supports doubling of sales & profits every 5 years. Sector is able to allow the business to double sales & Profits every 5 years. Look out for rising industries that may replace the sector based on a different paradigm.

8) Business has a sustainable competitive advantage. Examples of Competitive advantage: The business should either be top 1 or 2 in its particular industrial niche. It could also have a great brand. It can also be consistently the most cost effective in its industry.

Valuations for businesses

1) PEG Ratio (<>0.8). This would mean one is acquiring a business that is very cash rich and that the valuation is supported by the cash in the company's vaults.

4) Consistent Net Dividend Yield (> 10%). This would mean that the business is very likely a cash generation machine.

by Ken Chee