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Growth Investing - Qualitative Analysis: Business

by Raymond
Updated June 3, 2020

Based on the PACS Principle
P - Potential to Scale
A - Awesome Quality
C - Continuous Compounding
S - Safety

4.2.1B Awesome Quality (Introduction)

Great companies do either the following:

  • create better products/services that can do for lower price or same price (value)
  • create greater conveniences
  • create products that solve real world problems or pain points of customers
  • delight customers

Business Models Quality:

  1. Blue Ocean
    • create an entire new market solving customers' unmet needs
  2. Essential Products/Services & Customer Stickiness
    • products or services that customers/businesses have huge dependency
  3. Lumpy or Recurring
  4. Scalable
    • franchise/technology/SaaS

4 Things to Consider Before Buying A Business

  1. Usefulness of the product
  2. Customer mindshare
  3. Able to raise prices, if needed
  4. Is it hard to duplicate it?

How to Determine the Quality of A Business

Use Social Media to check

  • Website
  • Facebook
  • Instagram
  • Youtube

4.3.1 Continuous Compounding

You want a company that can grow consistently year after year.

Avoid cyclical companies such as:

  • property developers
  • semiconductors
  • airlines
  • commodity (mining, steel, oil)
  • construction machinery

Never invest in the following companies:

  • Infrastructure, Real Estate, Cement
  • Power/Utility
  • Distributor
  • Commodity (Agriculture/Paper/Basic Chemicals)

Questions to Ask Yourself:

  1. Will this business be around for the next 5-10 years?
  2. Will technology disrupt this business?
  3. Am I Certain this business is going to grow more in the next 5-10 years?

4.4.1 Safety Introduction

Typical Business Purchase Requirements:

  • Operating profit margin > 8%
  • ROE > 15%
  • Cash conversion cycle < 130 days

Safety is split into 2 Risks:

  1. Business Risks
    • Key man risk
    • Customer risk
    • Regulatory
  2. Valuation Risks
    • Price Discipline

Key Man Risk
The entire business should never depend on a single individual.

Question: If an important management or team member leaves the company, can the business still operate as usual? or grow as usual?

Example: Tesla (Elon Musk) & Coca-cola (Who?)

Customer Risk
A business should never have a high concentration customers.

How to check Customer Concentration with Edgar
https://www.sec.gov/edgar/searchedgar/companysearch.html
Search for terms like

  • concentration
  • 10% or more
  • more than 10

Regulatory Risk

  1. Health related (medicine, sugar drinks)
  2. Essential goods (defence, power utility, water)
  3. Entertainment (gambling)

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