This week, I try to summarize 10 key factors to look into figure out the quality of a business.
10 Factors to judge the quality of a business
From an investing point of view, “high quality” is subjective. Subjective to your risk appetite, time horizon and your own biases. But it would be fair to say that, a company that can assure a certain amount of return over a period of time can be considered as high quality. The quality coming from the certainty to which we can look into the future.
That said, there are countless ways in which the future can unravel. Hence, we need to have a margin of safety in our thesis about a company and it’s future.
The analysis can be divided into a qualitative and quantitative parts.
The 5 main aspects to figure out from a quantitative perspective are:
1. How has the returns been historically? What drove them?
2. How are the costs for running the business?
3. How much debt does the company have? Is it good debt or bad debt?
4. What are the margins in the business?
5. These metrics alone over time is not that helpful in itself. The key step here is to compare it with that of it’s competitors.
The 5 main questions to answer from a qualitative perspective are:
1. How does the business make money?
2. Does it have a competitive advantage? How will it maintain or grow it in the future.
3. Is that source seem to be stable or volatile
4. What kind of factors affects its ability to continue as is
5. How are the people running the business?