Before making an investment, the Christian investor should have a checklist made up of qualitative and quantitative variables as a benchmark in selecting a great company at a wonderful price. One can’t go through life without goals; one can’t be a successful investor without having standards and principles that are non-negotiable.
It has been one of my constant refrains in selecting a company to place the humility of management, particularly the CEO, at the apex. The Bible often equates humility with wisdom. Hear the words of James: “Who is wise and understanding among you? Let them show it by their good life, by deeds done in the humility that comes from wisdom” (James 3:13). Observe the counsel of Solomon: “When pride comes, then comes disgrace, but with humility comes wisdom” (Proverbs 11:2).
Who do you want at the helm, a person of pride or a person of humility? I think humility. So, what is the origin of humility? Most individuals with a humble streak had their humbling moments. Most grew up in poverty; some had debilitating illness; others experienced adversity of varying types. Still, there are those who were raised in an environment of faith and respect towards others irrespective of pedigree.
Here are some pride to humility examples: Joseph became a slave; Moses spent 40 years in the desert; Paul experience blindness for three days.
Listen to the company conference calls and pay attention to the tone in which management speaks with financial analyst and investors. Conference calls are a wonderful forum to get a feel of management attitude. It was in a conference call that Enron’s CEO, Ken Lay, use the “f-word” in response to a question from a financial analyst. That should have been a MASSIVE RED FLAG to all investors.
Is the CEO the Da Vinci of his craft? George S. Clason forewarns in his book, The Richest Man in Babylon, “why trust the knowledge of a brick-maker about jewels? Would you go to the bread-marker to inquire about the stars?” Investors should conduct an inquiry about the ability of the CEO, how long has he been employed in the industry and what has been his track record.
Has the CEO made mistakes? Albert Einstein so aptly stated, “Person who never made a mistake never tried anything new.” However, moral transgressions of an egregious nature should be deemed suspect.
Does the CEO craves efficiency and detest bureaucracy? Is management shareholder-oriented in deploying capital? Are expenditures in new projects generating a respected return on invested capital (ROIC)?
Here are thirteen quantitative checklist variables that will help you encapsulate the health of a company on one page:
|7 FAT COWS CHECKLIST|
|VARIABLES||YES / NO|
|1||Working Capital Ratio (current assets / current liability) > 2|
|2||Positive Net Tangle Assets (total assets – goodwill – intangibles – total liability)|
|3||Price / book (price per share / book per share) < 1.5|
|4||Price / Earnings (price per share / earnings or net income per share ) < 15|
|5||Positive free cash flow in the last (3) years (operational profit – capital expenditure)|
|6||Free Cash flow yield (free cash flow / market capitalization) > 15%|
|7||Return on assets (net income – dividends / total assets) > 10%|
|8||Interest coverage (Interest before interest and taxes EBIT / interest payments) > 7|
|9||Debt to Free Cash Flow (long term liability / free cash flow) < 5|
|10||Debt to Equity (long term liability / shareholders equity) < 50%|
|11||Dividend yield > 2%|
|12||ROIC (net income – dividends / total capital) > 15%|
|13||Gross margin increase for the last three years|