5  Minute

Stock - Picking
Checklist
1. Start with a company whose
products you use and like
2. Look for rising sales and profits

3. Debt should be under control

4. Promoter holding should be strong

5. Available at good valuations

www.goelasf.in
Goela School of Finance LLP ©

1. START WITH A
COMPANY WHOSE
PRODUCTS YOU LIKE
AND USE

We want you to have a look around your house

and notice what all products you and your
family members buy (and will continue to buy).
If you like a company’s products better than
those of its competitors, that’s important. Talk
to friends to see if they also consume those
products, if they also love them then you've hit
jackpot.

You always buy Maggi? Look at Nestle.

You see Scotch Brite in your kitchen everytime? 2. LOOK FOR RISING
Look at 3M.
You always see your dad buying shoes from SALES AND
Bata and now you love them too? Look at Bata. PROFITS
As direct consumers you're the ones who will
decide the numbers which will be shown in
the company's financial statements.

As investors, we win when stock

prices go up. They go up when
profits go up. The best method for
raising profits is to raise sales.
Rising sales means that consumers
want more and more of what the
company produces. Therefore, it is
critical that the company have a
track record for increasing both sales
and profits. You can check sales and
profits by clicking the Financials tab
at any good investment site.

Also keep in mind that this rise

should be stable and consistent

We recommend moneycontrol.com
or screener.in
Goela School of Finance LLP ©
3. STRONG PROMOTER
HOLDING
High promoter holding indicates
that promoters have more ‘skin in
the game’. If the promoters are
holding the majority part of the
company then it clearly shows that
they themselves are very optimistic
about the future of the company.
Also if the promoters have a strong
holding then external influence is
minimal and they can take quick
decisions. This will enable the
company to be on par in this
dynamic world.
The downside to a high promoter
holding is that low free-float stock
makes the price vulnerable.
Relatively small transactions (buying
or selling) may influence the stock
price disproportionately (but this
won't matter in the long run).
4. DEBT SHOULD BE
UNDER CONTROL
Pick companies with the lowest
possible ‘debt-to-equity’ (D/E) ratio.
High debt level will lead to high
finance costs, which will ultimately
erode the company’s profit.
Two problems with having debt are
that it comes with interest payments
and it eventually has to be paid back.
When the amount of the interest
payments starts approaching the
amount of profit the company is
achieving, there’s a real problem
developing.
The main reason of any company
failing is debt. Cases like Kingfisher
Airlines, Unitech, Educomp (now
Jet Airways) are all because of high
debt.
As a thumb rule the debt should not
be more than 2 times of the reserves
the company has.
Note: There can be an exception in
this case where the business require
huge capital funding for their
operations (Banks and Financial
Institutions)
Goela School of Finance LLP ©
3. AVAILABLE AT GOOD
VALUATIONS (VERY
IMPORTANT)
When we say that a stock is expensive, we
mean that its price is high compared to the
profits it is earning on our behalf. With the
average company, for each dollar in profit it
makes, its stock price is about 15 times greater.
For example, the average company earning
Rs.10 in profit per share would have a share
price of about Rs.150. Notice the ratio, called
the P/E (i.e.: Share Price to Earnings per share)
is 150/10 = 15. Sometimes investors get
overexcited about the future of a company and
push its stock to levels higher than the
underlying business justifies.
Let’s say that Reliance's stock is reasonably
priced now at Rs.1000 per share. The company
announces that in the coming year 5G service
will allow it to boost profits by 50%. That would
support the price rising from 1000 to 1500 (50%
more than 1000) over the course of the next
year. Now let’s say that you discover this
company in the middle of the following year
and its stock price has just blown past 2500 per
share. The company is doing well, no doubt.
Actually, it’s doing amazingly well. Investors
love it, but too much to justify sending the price
all the way up to 2500. We can say that the
stock price has gotten ahead of itself and that it
is overpriced.
The rate at which corporations are
growing their profit has a big effect
on what a fair P/E ratio for the
company is. There are companies
with very high P/E ratios, like HDFC
Bank, that investors continue to love.
Instead of racking up big profits, it
reinvests to dominate the future of
banking. In the other extreme, there
are those whose low P/E ratios
seem like a good value but are not
because the companies themselves
are losing ground and investors are
losing faith in them. They may be on
their way to bankruptcy.
Therefore you can get a rough idea
of a stock’s valuation by comparing
its P/E ratio to its historic average,
or with its peers. But P/E has few
major drawbacks, therefore we
advise to focus more on PEG ratio.
PEG Ratio: Valuation to earnings
growth rate should be looked at to
see how much expectation is built
into the stock. You want to seek out
companies with strong earnings
growth and reasonable valuations –
a strong grower with a PEG ratio of
two or less has seems to be a good
value, with good margin of safety.
"Buying the right
company is necessary,
but buying it at the right
price is even more
important."
Goela School of Finance LLP ©

BONUS:
Share your ideas with
experienced investors

If you know such a person, make a

case to him or her on why it’s wise to
invest in the company you've
selected. You'll be surprised on how
much you'll learn in the process.

P.S. If you don't know any

experienced investors then send
your analysis over to us at
info@goelasf.in. Both of us (Harsh
and Aditya) will personally reply to
your study

To your success,

Harsh Goela
Aditya Goela
5 MINUTE
STOCK
PICKING
CHECKLIST

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