How does a company enter my radar?  This is the initial part of the homework.  I do not actually specifically go look for companies but I stumble upon them through various means.  These means include recommendations on investment websites, “The Edge” magazines and simply coming across brands in my daily life.

So what kind of companies do I invest in?
i)    Business which I found to be interesting with potential to grow, valued reasonably.
ii)    Companies which are valued cheaply with its fundamental intact.

Based on what I read from different books and websites, these are the criteria I look for when I screen a company.

1) Company has shown consistent growth of 15% in both revenue and net profits over the past 5 years
Since I am looking for growth companies, this is important.  I can accept a year where revenue or profit is flat.  However, there must be a trend that the company is growing over long terms.

2) Company’s net profit should be around 10%
A higher percentage of net profit ensures that the company is not too badly hit when they cannot pass the cost to customers.

3) Company’s ROE around 20%
ROE shows how the company manages its equity.  A high ROE shows that management put to good use of their equity and not makes silly investment.  If the company is not able to sustain a high ROE, it should return the net profit to investor as dividend.  The amount of debt a company carries must be taken into consideration when using ROE.  With a high amount of debt, ROE will be higher.

4) Company’s cash position and cash flow
The company should carry little long term debt unless it is necessary for expansion.  I would avoid companies that requires large amount of capital expenditure (capex) regularly.  The operation cash flow of the company is also important.  It should mirror its earning.  I would avoid a company that consistently shows a must lower cash flow as compared to earning without investment/capex.

5) Management credibility and ownership
This is hard to judge but I would take it that if management is able to keep his promise or target and not afraid to come out to justify the company’s poor performance as creditable.  It would be a plus point if senior managements hold shares of the company; this will align their purposes with the investors.

6) PE less than 10 and PEG less than 0.7
I am attracted to company with a PE ratio of 10 and below.  Alternatively, if its PE ratio to Growth rate is less than 0.7, it will be a possible candidate.