Avoid Investment Mistakes with this 40 Point Stock Checklist

The Use of Stock Checklists

stock checklist

How to Use a Stock Checklist | Flickr: Stockmonkeys.com

I recently came across an interesting article in The New Yorker magazine called The Checklist written by a multi-talented surgeon who is also the author of an interesting book I am reading called “Complications: A Surgeon’s Notes on an Imperfect Science”.

The article is quite long but it boils down to that in spite of strong evidence to the contrary, highly trained people think it’s below them to use check-lists as they know what to do and working through a check-list is an insult to them.

From the article:

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 checklist with steps as simple as “wash hands with soap”.

Check-lists work best in a complex environment where the performing of certain steps is 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 your control. You however, through empirical research, know what increases the probability of you making profitable investment decisions.

What is thus important is that you focus on what you can control in your research and analysis.

My 40 Point Checklist

As part of my evaluation process I work through the following check-list:

  1. Can I in one sentence say exactly what the company does? (Thanks Cristina)
  2. Is operating cash flow higher than earnings per share?
  3. Is Free Cash Flow/Share higher than dividends paid?
  4. Debt to equity below 35%?
  5. Debt less than book value?
  6. Long Term debt less than 2 times working capital?
  7. Is the debt to EBITDA ratio less than 5? (Thanks Guy)
  8. What are the debt covenants?
  9. When is the debt due?
  10. Are Pre-tax margins higher than 15%?
  11. Is the Free Cash Flow Margin higher than 10%?
  12. Is the current asset ratio greater than 1.5?
  13. Is the quick ratio greater than 1?
  14. Is there growth in Earnings Per Share?
  15. Is management shareholding > 10%?
  16. Is the Altman Z score > 3?
  17. Does the company have a Piotroski F-Score of more than 7?
  18. Is there substantial dilution?
  19. What is the Flow ratio (Good < 1.25, Bad > 3)
  20. What are management’s incentives?
  21. Are management’s salaries too high?
  22. What is the bargaining power of suppliers?
  23. Is there heavy insider buying?
  24. Is there heavy insider selling?
  25. Any net share buybacks?
  26. Is it a low risk business?
  27. Is there high uncertainty?
  28. Is it in my circle of competence?
  29. Is it a good business?
  30. Do I like the management? (Operators, capital allocators, integrity)
  31. Is the stock screaming cheap?
  32. How capital intensive is the business?
  33. Does management have the ability to naturally re-invest in the business at a high return?
  34. Is the company highly profitable?
  35. Has it got a high return on capital?
  36. Has the business got an enormous moat?
  37. Is there room for future growth?
  38. Does the business have strong cash flow?
  39. What has management done with the cash?
  40. Where has the Free Cash Flow been invested?
    1. Share buybacks
    2. Dividends
    3. Reinvested in the business

Speaking of checklists, click on the image below to download the best free investing checklist that will organize your thoughts and save you time.

download investing checklists

I also have an analysis spreadsheet for companies I have come across through the Magic Formula Screen from Joel Greenblatt.

For these companies I use these additional check-list items:

  • Are there any Magic formula value outliers?
  • Is the company in a bubble industry over the last 5 years?
  • Does the cash belong to the company?
  • Is EBIT / Assets > 20%

I have put this checklist together over a period of more than 20 years and often make changes as I gain new information and insights.

I also do not have a formula that if a company fails X amount of points on the check-list I do not consider it.

The checklist 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 stock checklist points in your analysis process and let me know if you have any additional points I can add in the comments below.

About the Author

Tim du Toit is editor and founder of Eurosharelab. On his website he reveals what more than 20 years of equity investment have taught him – sometimes at considerable cost. To discover how you can avoid costly mistakes and enjoy greater profits, sign up for his free newsletter “Investing that makes sense” at Eurosharelab.

What is Old School Value?

Old School Value is a suite of value investing tools designed to fatten your portfolio by identifying what stocks to buy and sell.

It is a stock grader, value screener, and valuation tools for the busy investor designed to help you pick stocks 4x faster.

Check out the live preview of AMZN, MSFT, BAC, AAPL and FB.

12 responses to “Avoid Investment Mistakes with this 40 Point Stock Checklist”

  1. Pete A says:

    Just want to thank you for this one! I also reread your flowchart/checklist from prior times…very good as well.

    So, Thanks!

  2. Jae Jun says:

    Im just glad Tim allowed me to post it. A very good checklist indeed. One that I am working on from the lessons learnt this year is quite big and unorganized at the moment. Trying to make it easy to use and follow. Not as easy as I thought.

  3. jj says:

    Just a quick question, hoping you might be able to explain one of the items, “What is Flow ratio (Good3)”

  4. Jae Jun says:

    Efficient Working Capital Management, measured by a Foolish Flow Ratio below 1.25.
    This item is nearly universal. There are very few businesses where the need to pay out money faster than it comes in is a positive attribute. The components of the Flow Ratio are current assets – cash, divided by current liabilities – short-term debt. Temporary spikes are OK, long-term bad capital management is not…. (go to the link for the rest)

  5. suren rathi says:

    If you were a customer of the company would you buy its product.

  6. Jae Jun says:

    Hi Suren,
    I dont understand what you mean.

  7. Tim says:

    @jj Here is what the Flow ratio measures:

    A low flow ratio tells you that the company has an asset light business model or that it has a really good working capital management.

    A low ration means the company either has a low amount of current assets or it is able to finance current assets entirely with low or no cost current liabilities (like accounts receivable).

    A high flow ratio means that the company has to invest a substantial amount of money in working capital assets or that the company is really bad at managing its working capital.

    Bad working capital management would be having too much inventory or collecting accounts receivable very slowly.

    A ratio of less than 1,5 is really good. Should the ratio go over three, it’s a warning sign for you to find out why it is so high or to be very careful before investing in the company.

    For more information, and how it is calculated, you can have a look at this article I wrote:



  8. the donald says:

    I think that is one of the questions that Peter lynch ask in one of his books. I will restate the question a little differently. If you were a customer, would you shop or do business there?

Pick Winning Stocks and Fatten Your Portfolio