Company Analysis Framework

Company Research Basic Elements#

I. Company Research Basic Elements

Industry Research: Industry chain / Competition / Porter's Five Forces / SCP / Game Theory
Company: Business model / Non-enterprise attributes / People - Culture - Ecology - Strategy
Historical Performance: Growth / Strategic capability / Advantage creation / Risk management capability / Management
Positioning, competitive strategy, and core competitiveness (core market - assets - capabilities)
Management and Governance: Ambition + Integrity + Drive + Strategy + Historical Performance

Company Value Chain Analysis / Key Drivers

Products and Business: Customer demand / Supply and demand outlook / Pricing power / Cyclicality / Scalable new business
Financial Performance and Attribution: Profitability - DuPont / Operational efficiency / Growth / CF/BS/CapEx
Performance Forecast: Business segmentation / Trends / Growth / Transparency / Multi-scenario analysis
Capital Markets: Increase or decrease in holdings / Integrity record / Financing / Buybacks / Stock price fluctuations / Beta
Risk Analysis: Changes in key drivers / Deterioration of key environmental variables

The main purpose of this section is to distill the first step of company investment factors, providing a comprehensive overview of all aspects of the company, collecting information, and accumulating data to lay the foundation for subsequent steps 2-6.

II. Company Analysis Variables

1. Market Demand Space

Does the product/technology/business model align with social development trends?
How large is the demand/market space? Has it been activated? Is it overly segmented?
What types of potential customers are there? What are their demand points, purchasing willingness, and payment capabilities?
What are the driving forces behind demand evolution? (Cognitive / Psychological needs / Functional needs)
What are the demand development trends for the next 3-5 years? Will it explode, weaken, or disappear?
Are there potential substitutes? Are there barriers to entry and exit?
What is the actual decision-making logic behind customer purchasing behavior? What is the psychology?
What characteristics does the demand/market have? Is there cyclicality? How does it fluctuate? Regionally?
Is pricing regulated? How can the business model be replicated for growth?
Will new technologies, new products, or new business models change the competitive landscape?

2. Moat / Competitive Advantage

We roughly categorize the company's competitive moat into the following 9 types.
Intangible Assets: Brand - Emotional connection / Patents / Licenses / National secrecy / Scarcity
Switching Costs: Education and training / Switching risks / Replacement costs / Emotional connections - Addiction
Network Effects: Transaction platforms / Technology platforms - Is it a one-size-fits-all?
Cost Advantages: Business model / Processes / Geographic location / Resources / Craftsmanship / Business synergy
Scale Advantages: R&D / Raw materials / Production / Distribution / Channels / Services / Pricing power / Costs
Technological Barriers: Technological leadership / Monopoly - (not unbreakable)
Resource Monopoly / Capital Barriers / Strong Latecomer Advantages can defeat giants
First-Mover Advantage: Regional, small market, homogeneous products
Latecomer Advantage: High exit barriers, heavy assets. Low-cost factors. Low learning costs.

The above classifications may not be entirely accurate in practical applications and may even be rigidly applied, so it is essential to return to the essence of "core competitiveness" to think about the issues, such as:

How to characterize the company's core competitiveness? Is it uncopyable / plagiarizable / destructible?
How do competitive factors interact? What is the lifecycle?
Is the competitive advantage closely tied to business characteristics? Has it been fully utilized?
What are the competitive disadvantages? How do they affect operations, pricing, and growth?
Can a winner-takes-all scenario form in industry evolution? Does management highly agree with this point?
What is the source of core competitiveness? Can competitors learn and imitate? How difficult is it?
Is the profitability level above peers? Sustainable? What factors are most concerning?
How are the advantages in raw materials, R&D, manufacturing, marketing, and services?

3. Pricing Power:

Comparison of profitability of similar products; gross margin levels and changes;
Price increase capability; competitive structure; scale effects; industry leadership.
How is core competitiveness reflected in financial performance? Is it the best company in the industry?

4. Growth Potential

What development stage is the company's business in?
Is the growth momentum sufficient? Is the growth path and logic clear and determined?
Is there a positive feedback mechanism that makes the business grow stronger?
Is the growth logic I researched consistent with management's thinking?
Is there core competitiveness and reasonable sustainable high growth?
Is there a focus on cutting off loss-making businesses and returning to core business?
Are the company's capacity, functions, and management coordinated to support high growth?
Is the time frame for analysis appropriate? Longer or shorter?
What are the trends in pricing, sales volume, costs, expenses, taxes, and non-operational factors?
How to determine the growth cycle position of the company/industry?
Where is the ceiling for product/industry growth? (Demand space, competitive landscape)
Is the inability to continue increasing market share and ROE a sign of maturity?
Is the profit growth rate starting to decline while the stock price skyrockets to a peak? How to achieve growth?
Regional expansion - New products - Channel expansion - Volume increase - Price increase - Mergers and acquisitions
Are there successful cases of similar companies/products abroad? What is their growth logic?

In fact, the growth potential of a company generally has two intertwined variables: the development of the demand market and the company's own competitiveness. The former indicates how large the whole cake is, whether it is growing, maturing, or even shrinking, while the latter refers to how you can outpace competitors to eat the cake, whether by dominating consumers (e.g., brand, licensing), dominating channels, having the best technology experience, or having the largest scale and lowest cost, etc. The larger the cake, the stronger the company's competitive advantage, and the better the company's sustainable growth potential. Missing one factor will discount sustainable growth potential.

5. Management and Governance

Integrity, Proactivity, Transparency + Low Management Difficulty + Seizing Opportunities to Respond to Challenges

Who is the actual controller? How much control do they have? Is the equity too dispersed?
How is the management team's historical performance? Are there any negative news or historical stains?
How is the integrity record of listed companies in the past three years?
Is the decision-making process for significant matters rigorous and scientific, with sufficient discussion by the board of directors?
Do the strategic intentions, actions, and company advantages align with investment logic?
Are there any low-level management mistakes? How did they respond at the time? What was the effectiveness?
What are the entrepreneur's values, experiences, personality, and charisma? Leadership style?
What are the strengths and weaknesses? Are they humble yet professional and resilient? What is their tenure?
What is the team's learning ability, vision, and market sensitivity? Are they willing to face reality?
Does the team's skill set meet the current competitive and operational needs of the industry?
Is there ambition, striving to be number one, or just going through the motions? Aggressive or wisely conservative?
How is the team's incentive mechanism, cohesion, and combat effectiveness? Is there a drive for progress?
What are the cultural and value genes? Intense competition - wolf culture, encouraging innovation - relaxed and equal?
Can trust, equality, sense of responsibility, initiative, and delegation allow top talent to feel secure?
How does the management layer determine their compensation? Is it the highest in the industry? Is the team stable?
Does the company lead the entire industry chain to achieve complementarity and win-win?
How do peers, competitors, or upstream and downstream view the company team?
Have past commitments been fulfilled? Is it the result of internal efforts or just a rising tide?
Are there fewer commitments and more performance, or more commitments and less performance?
Are they willing to maintain long-term honest, full, and transparent communication with the capital market?
Do they deliberately avoid or beautify negative news, use clever words to disguise, or are overly optimistic?
Do senior executives have a clear and correct understanding of the industry, company, and business strategy?
Is the business model legal, value-creating, sustainable, and in line with major trends?
What is the biggest risk? Do they have strategic foresight or simply follow competitors?
Are there executives or their relatives serving or holding shares in the company's suppliers?
How difficult is business management? Is it a series of easy decisions or painful choices?
Imagine how the government, peers, and upstream and downstream would undermine the company?
How is the company's strategic execution capability?
Are personnel in various departments stable? (The resignation of financial personnel may indicate financial issues, etc.)
How does the company create new growth points? (Old companies rarely have big ideas.)
Are historical major decisions shareholder-oriented?
What results have past major decisions brought? Have they begun to layout future competition and growth?

6. Margin of Safety

What uncertainties are there in the analysis? What is the level of information mastery? What are the observable keys?
Is the investment logic robust enough? Small and medium market capitalization? - Scale is the enemy of growth.
After a significant adjustment in stock price, is the volume shrinking and price stabilizing? Is the dead bull of this stock changing its opinion? What is your view?
How is the target price of the stock determined? Are there any short-term negative factors leading to a decline in stock price that presents an entry opportunity?
Can it make a comeback after a negative shock? (Well-known events like the toxic capsule incident, melamine incident, liquor anti-corruption, etc.)
Strong competitive advantage? Outstanding management?

Charlie Munger particularly emphasizes reverse thinking; to know how to live better, one must first learn to avoid dying (drugs, jaywalking, drunk driving, etc.). Inspired by this, here are some guidelines to help filter choices.

7. Reverse Thinking in Company Selection 1: Traps to Be Cautious Of

Companies eliminated by new technologies
The underdog in winner-takes-all industries
Heavy asset sunset industries with excessive competition and overcapacity
Cyclical companies at the peak of prosperity
Niche small industries/products with high growth encountering market space bottlenecks
High-growth companies with accounting fraud: inflated revenue, channel stuffing, excessive price increases, Q4 face changes
High growth of mature cycle stocks
High growth due to competitors exiting
High growth from a low base
Relying on big clients, needing to consider one's own strength, dependency, and the growth of the big client
Cash flow tight, accounts receivable and revenue surging, little cash on hand, large amounts of advance payment engineering companies
Blindly unrelated diversification (the process favored by wealthy entrepreneurs of "getting big and strong and then dying")
Companies lacking continuous R&D/new product capabilities (especially those with short product cycles)
Control too dispersed with no one responsible
Big enterprise disease and state-owned enterprise disease: bureaucracy, rigidity, internal friction, slow response, lack of vitality

8. Reverse Thinking in Company Selection 2: Preventing Fraud and Emotionality

Confirm the top five customers and end users to prevent false large orders;
Huge orders, hot acquisitions unrelated to the main business;
Grassroots research on industry upstream and downstream, corroborating views with the company and analysts;
Companies with consumer attributes must conduct research at the end/user;
Be wary of financial statement fraud, paying attention to cash flow/accounts receivable and payable trends;
Opinions and logic should have a wealth of reliable details and basic conclusions to support them;
Are the information providers reliable? Do they have relevant interests? Are they biased?
Independent thinking, do not blindly trust others (peers/authorities/friends);
When analysts recommend, is market sentiment enthusiastic?
In the analysis process, which are facts, which are established trends, which are reasonable inferences, and which are one's own fantasies, biases, emotions, and values?
Are you anchored by concepts, conclusions, other hot stocks, or psychological maps?
Are there erroneous reasoning and thinking methods?
How to refute and overturn the entire investment logic? How long is its effectiveness?

You are a manager; here are some principles to consider:#

1. Retention Principle: Retain 30% of excellent employees, maintain 50% of qualified employees' stability, the remaining 20% can actually be fluid; an appropriate turnover rate will keep the company vibrant. Don't panic when employees leave; people will always come and go.

2. Inform the team of the company's real operating situation, short-term plans, and long-term plans, and tell them the company has ambitions. Maintaining rapid business growth is the best way to retain excellent personnel.

3. Based on the company's business development situation, regularly raise salaries for excellent employees to ensure compensation levels. Many times, it's a matter of money.

4. Communicate face-to-face with excellent and important employees, tell them your expectations, understand their thoughts, and design upward channels for them. Important employees may not necessarily be excellent, but they are indeed very important; do not ignore them.

5. If you feel there is a problem, there must be a problem; deal with it immediately to possibly salvage the situation. Don't wait or deal with it later. The waiting process may lead to bad things happening. Don't wait until Murphy's Law takes effect to regret.

6. Let people in the team be busy with the right things; do not let employees stay in their comfort zone for too long; give them more challenges. Let capable people keep repeating one thing; they will eventually leave.

7. When employees leave, try to communicate with them deeply, show your sincerity, and understand their true thoughts. If you just talk superficially, they won't tell you the truth. For example, once I communicated with a departing employee, besides the previously discussed direct supervisor and HR feedback of "heavy work pressure, too many messy projects with no challenges," the real reason for their departure was the last salary adjustment was too low. This happened due to historical reasons, but at least it will help us improve future work.

1. What are we analyzing when we analyze a company?#

Published on: 2019-05-11
Let's outline it.
I. Company Information

Company introduction and history, collect news reports from the past 5 years (if any).
Company employee composition and core team resumes, collect news reports from the core team over the past 5 years (if any).
Situation of subsidiaries, branches, and affiliated companies.
Has the company had any major lawsuits in history? If so, relevant content and results (if already judged).
Future product planning and business planning of the company, and what will the company look like in 5 years?
II. Product and Business Information
Detailed introduction of the company's products, preferably with product white papers and demos.
Who are the upstream suppliers? What raw materials are purchased from these suppliers? What factors affect raw material prices? What are the payment terms?
Who are the downstream customers? How to reach customers? How are orders obtained? How is pricing determined? Payment methods? What are the payment terms? If it is an internet company, how to reach users, customer acquisition methods and costs, conversion (to registered users, paying users) situation, retention situation.
The company's user/customer development situation over the past 5 years (if any). If it is an internet company, the DAU/MAU and ARPU growth situation over the past 5 years (if any).
The company's intellectual property layout, including a list of existing patents, including those already applied for and those currently being applied for.
Who are the main competitors, what are their products/services compared to ours, and what are the main advantages and disadvantages? Their revenue and gross profit situation over the past 2 years.
Future product planning and implementation progress (Roadmap) for the next 3 years.
Customer and industry expansion plans for the next 3 years.
III. Industry Information
How large is the industry?
How large is the industry space in the next 5 years?
What is the market share situation of each player in the industry?
How much market share can the company achieve in 5 years?
IV. Peer Competition
Who are the competitors? What is the core competitive advantage of the company? (Products, teams, etc.)
What are the production and technical capabilities of competitors? What is the main competitiveness of their products?
What are the advantages and disadvantages of the company compared to competitors?
What is the gap with international top manufacturers (in terms of products, technology, market, customers, etc.); how to narrow the gap?
Company gross margin vs. competitor gross margin?
Company operating profit margin vs. competitor operating profit margin?
Company net profit margin vs. competitor net profit margin?
Company payment terms vs. competitor payment terms?
V. Financial Information
Company financial statements for the past 5 years (if any) (balance sheet, income statement, and cash flow statement).
Provide company revenue, gross profit, EBIT, and net profit composition segmented by customer, industry, product, region, etc. for the past 5 years (if any).
Revenue, gross profit, and net profit forecasts for the next 3 years and corresponding drivers.
Breakdown of the company's revenue for the next 3 years, categorized by customer, industry, and product.
Detailed performance forecast for the current year, specific to each product, each model, and each customer's pipeline.
Orders already in hand for the current year.
Company cash on hand, cash burn over the past 18 months (if any), and expected cash burn over the next 18 months.
VI. Equity Information
Financing history.
Cap table.
Information on directors, senior executives, and supervisors.

2. Checklist: How I Analyze a Company#

Charlie Munger once said that an investment checklist is his most important investment and thinking tool. Today, I will talk about my investment checklist.

Performance:
Assess the industry's growth rate for the next 2-3 years (based on population, industry penetration rate, GDP, government investment, etc.; different industries have different assessment methods), determine whether the industry is in the conceptual phase, startup phase, high growth phase, mature phase, or declining phase.
The current business model of the company: revenue sources (who's money is being made, B-end or C-end, whether the user group is high-end, mid-end, or low-end) and cost structure (heavy asset or light asset). What position is the company in the industry chain, what are the upstream and downstream segments, and how is the company's position in the industry chain?
The development history and current status of the company's business, as well as the main regulatory policies currently in the industry. Pay attention to advertising; the history of advertising is the history of the rise and fall of industries and enterprises. Have people around you used the company's products? What are their experiences and evaluations? How are sales on e-commerce platforms like Taobao and JD.com, especially if a company with a market value of over 100 billion is targeting the B-end, it is particularly important to determine its position from industry insiders, as you usually cannot access its products and services.
Expectations for the company's performance growth over the next 2-3 years, and the driving factors for growth (multiple choices):
(1) Developing new businesses (geographic expansion, category expansion, or completely new businesses)
(2) Growth in sales of existing businesses (downstream demand recovery, new store openings, increased industry penetration, capturing competitor market share)
(3) Revenue growth from price increases
(4) Profit margin improvement from economies of scale
(5) Profit margin improvement from reduced three expenses
(6) Profit margin improvement from lower costs of raw materials, etc.
(7) Mergers and acquisitions
(8) Capacity expansion
Does the company show signs of a performance inflection point?
(1) Judging from advance payments (real estate and other engineering types)
(2) Judging from the leading financial statements of peers (like glyphosate at the end of 2012)
(3) Judging from upstream and downstream demand (like construction machinery in 2011, steel in 2016)
Major competitors in the industry: names of the top three companies in the industry (whether they are also publicly listed), their respective market shares, gross margins, and if the company's gross margin is higher or lower than other major competitors, the reasons are:
(1) Different business models
(2) Higher selling prices
(3) Lower costs
(4) Fake accounts
(5) Related transactions
(6) Economies of scale
What is the business model of the industry, what are the differences between individuals, and what are the core operational indicators (ARPU, active users for the internet, bad debt ratio, provision ratio for banks, order numbers, contract and bid amounts, accounts receivable/prepaid accounts as a percentage of revenue for manufacturing, etc.), and the supply and demand and price situation of upstream and downstream.
The company's competitive advantages and moats. Moats can be divided into: intangible assets (brand effect, franchising, patents, etc.), higher switching costs, low costs, and network effects. High-quality products, good management, and high market share are not moats. Moreover, a moat is not a sufficient or necessary condition for profitability.
Is the company a monopoly? Does it have pricing power? Monopoly is not a sufficient or necessary condition for profitability and growth.
What is the relationship between the company and its upstream and downstream? Does it have high bargaining power? Does it have the ability to pass inflation onto downstream? What is the prosperity sequence of upstream and downstream?
Will the company's products depreciate or even be disrupted due to technological advancements? (Kodak film, electronic watches, button phones, pagers, CRT TVs)
Is there fierce competition in the industry? For example, the rapidly growing health products and tourism industries, aviation industries, etc. For instance, marginal costs approaching zero lead to services becoming free, such as brokerage firms, online services, tool-type apps, certain software, etc. Or are all companies in the industry burning money madly, but the business model is unstable, like shared bicycles?
Major risks:
(1) Limits to growth, such as in banking and white goods industries.
(2) Overcapacity and inventory issues, such as in liquor and clothing industries.
(3) Declining competitiveness (business model being disrupted), such as in the retail industry.
The last two points can be found in the prospectus, recent fundraising reports, and management discussions in financial reports. The first point requires looking at valuations and a comprehensive judgment of the industry (combined with individual stock assessments of the first point's industry growth rate).
Financial analysis: Vertical and horizontal comparisons of ROE (beginning, weighted average, multi-year average), debt ratio, turnover rate, gross margin, operating income, free cash flow (operating cash flow - investment cash flow, focusing on non-financial enterprises), important asset items (pay attention to find clauses about revenue recognition, bad debt reserves, and impairment reserves in the notes), investment projects, non-recurring gains and losses, hidden assets, major asset change projects, related transactions, overseas income ratio, revenue ratio from the top five customers.
And the company's strategy and market situation in the report. Comparison of consolidated statements and parent company statements. Tax rates. What exactly is included in the main business's "other," and the situation of capitalizing expenses. However, large shareholders' substantial participation in private placements and increases can offset many small financial issues, focusing on value rather than nitpicking.
Information on major shareholders' increases and decreases, executives' increases and decreases, private placements, stock distributions, mergers, equity incentives, employee stock ownership, shareholding ratios of the top ten shareholders, pledging of major shareholders' equity, penalties, historical black history events, and all related information.
For small and medium-sized enterprises, how is the management team? Ages 40-50 are optimal, equity incentives, increases, past performance, and behavior are crucial. For large enterprises (over 50 billion), such as banks, brokerages, insurance, or Moutai, this is not important; those who grasp industry cycles and valuations can do so, and the management team has little impact on the company. What is the proportion of women in the management team? According to research by Harvard Business Review, companies without women in management may encounter problems.
Comparison of the proportion of sales personnel and R&D personnel, as well as per capita salary comparisons with peers, to see whether the company is sales-led or R&D-led, and whether the income-to-salary ratio is high compared to peers.
No stock is perfect; do not pick bones from eggs.
Valuation:
Distinguish stock types:
Value type
Growth type
Cyclical type
Value type: Focus on ROE and dividend rate, ROE>15%, dividend rate>5%, PE<15 is optimal, preferably with an annual growth rate of 5%-10%. This applies to banks, automobiles, home appliances, and traditional manufacturing industries. (ROE and PE determine PB, so examining PB is also effective for banks, automobiles, etc., which have certain cyclicality.)
Cyclical type: Valued by PB. Assess the profitability level of a cycle. If it is a heavy asset, examine operating cash flow (generally higher than net profit and reacts quickly). Chemicals, construction machinery, bulk commodities, and brokerages belong to this category. PB<1 is worth attention, PB<0.8 is best.
Growth stocks: Use PEG. Observe the compound growth rate of revenue and profit over the years, as well as the recent quarterly growth rates of revenue and profit. Note that some companies require non-recurring deductions, while others do not. PEG<1 is optimal; the faster the performance growth with the same PEG (e.g., both at 1), the better.
Consider:

The current PE's historical position
The current PB's historical position
Revenue growth rate, whether it has been stable historically, and whether it has reached an inflection point
Net profit growth rate, whether it has been stable historically, and whether it has reached an inflection point
AH premium, historical average, current level
Reference prices for equity in other listed companies held
Changes in major shareholders/executives/employees' stock ownership plans, internal participation in private placements, and mergers and acquisitions (backdoor listings) by major shareholders' related parties, share exchange ratios, subscription prices, focusing on amounts, shareholding ratios, and costs relative to current prices. The participation of industrial capital in private placements (or just some financial institutions and funds coming to arbitrage).
Valuations of listed companies abroad and in Hong Kong that are similar, especially those in earlier stages of development than us, can also be referenced to judge the future. History always repeats itself because human nature has changed little over thousands of years, so the paths taken by developed countries are very instructive for us.
Growth stocks are heavily reliant on both price and volume, and both cost control and price increases are unsustainable.
Cyclical stocks are best when downstream recovers and capacity is cleared.

Conclusion:
Extract keywords, your conclusion about this company (multiple choices):
(1) Good company at fair price
(2) Average company at extremely low price
(3) Adversity reversal/performance explosion
(4) Excellent management/high dividend rate and good record
(5) Major shareholder increase/company buyback/employee incentives/mergers and issuances, etc., price support
Trading Plan:
Should I buy? Buy on the next day? Buy at the current price? Wait for a certain price to buy? Not consider until it drops by half?
Is the invested capital long-term or short-term? What is the duration of the funds?
What is the expected annualized return?
What is the expected yield? What is the stop-loss point? Is there a take-profit?
What unknown situations would change your trading strategy?
What better stocks would you discover that would lead you to sell and switch stocks?
What unreasonable situation would lead you to sell?
Before buying a company, you should read, but not limited to, the following materials: prospectus, recent fundraising documents, all announcements in the past year, operational monthly reports, performance forecasts and quick reports, the last 5 years of annual reports and interim reports, relevant research reports, industry websites, individual stock history, and the latest policy documents...
Beyond individual stocks, you should read, but not limited to, the following materials:
(1) Basic economic knowledge, including micro and macro, recommended reading textbooks written by world economic masters.
(2) Value investment books, such as "Letters to Shareholders from Buffett," books by Peter Lynch and Philip Fisher.
(3) Accounting and financial management books.
(4) Management and organizational behavior books.
(5) Marketing books.
(6) Financial psychology books.
(7) Financial history and economic history books.
(8) Industry insights written by insiders.
(9) Introductory statistics and probability books.
(10) Broader books on human nature: psychology, literature, anthropology, etc.
(11) Current political news.
(12) National industrial policies.
(13) Financial regulatory policies.
Finally, write a trading diary before and after each transaction, regularly organize and review it. The trading diary includes but is not limited to:

Your judgments.
Eyewitness history.
Thoughts, analyses, and summaries about the market.
Assigning yourself further research tasks.
When writing, pay attention to:

When writing a trading diary, try to write down the logic of buying or not buying, selling or not selling as rigorously as possible; these logics can be verified or overturned over time, finding the reasons for your misjudgments at that time;
Clearly record which are known facts when writing logic; your analysis and inferences are based on these premises. It will be convenient to review later whether these facts really hold and whether they can have such an impact;
Quote others' evaluations, whether authoritative or civilian, with more points of trust, from different professional backgrounds and perspectives, to avoid being misled by a small group of people with common interests or uninformed crowds;
List which are subjective assumptions and guesses; the fewer assumptions and guesses in logical judgments, the better; over time, you will find that many of your assumptions are actually facts, just that you haven't discovered them; such assumptions can be very dangerous once they go wrong;
For logical judgments in the trading diary, indicate their timeliness. For example, closely track developments after the next quarterly financial report is released; when valuations double, the argument for undervaluation no longer holds; when national policies shift, it’s time to consider retreat, etc.
Before buying and after selling, check your checklist, and continuously expand and improve it as your investment ability grows; it is your mental map during the hunting process in the stock market, frequently used and renewed, so you won't get lost.
This checklist references my teacher @骑行夜幕的统计客's investment system and @那一水的鱼's "Investment First Lesson," hereby stated. Thank you very much.
I hope that after reading this, you will directly buy index funds and no longer have the idea of buying individual stocks, because after all this fuss, the return is not much higher than that of index funds. If you want to buy index funds after reading this article, you can follow my WeChat public account: 小散躺赢. There are courses on index funds and my regular investment records.
Buffett's neighbors and other Berkshire shareholders are much happier than Buffett because Buffett works hard, and they just lie down and share the profits.
Investing in individual stocks is a very labor-intensive and thankless task; I hope you choose this path carefully.

3. To Individual Amateur Investors: Teach You to Easily Analyze Companies#

Preface: This article is only suitable for ordinary + amateur individual investors like me; professional experts are kindly requested to skip.
From a broad logical perspective, the purpose of company analysis can be divided into internal management and external evaluation. The former mainly aims at improving company management, while the latter focuses on investment and financing judgments. As a personal investor, our goal is clear: to analyze companies, understand and comprehend them, judge whether they are suitable for investment, and thus achieve investment profits. In a word, company analysis that does not aim for investment profits is nonsense!
Based on the above purpose, I divide the company analysis framework into four dimensions: industry analysis, business analysis, financial statement analysis, and comprehensive evaluation of the company.
I. Industry Analysis
Analyzing the industry in which the company is located has three main purposes: to understand the industry’s prosperity level, competitive landscape, and technological changes. Let’s go through them one by one.

Industry Prosperity Level
Good industries, or industries with high prosperity levels, are more likely to produce good companies, just as top schools are more likely to produce top talents; this is not absolute, but statistically speaking, it is the case. This is also the probability thinking I have consistently advocated in investment.
Therefore, we find that consumer companies, especially those related to repetitive consumption, are more likely to produce big bull stocks, such as Yili, Haitian Flavoring, and Kweichow Moutai, among many others. The reason is simple: there are many people in China, and in terms of consumption, especially food and drink, they are not stingy at all. You see, CCTV even specially recorded the "A Bite of China" series, which shows the status of food (eating and drinking) culture in the hearts of Chinese people.
Based on this concept, in my personal opinion, the first choice in the investment field is consumer-related, and the second choice is healthcare (excluding pharmaceuticals). The logic for healthcare companies is the same; the basis is China's population advantage, but pharmaceutical companies are excluded because the industry is too deep and beyond my personal capability, which I will elaborate on later.
So how to judge the industry’s prosperity level? Generally speaking, the prospectus will describe the industry in which the company is located, and by reading that description, one can get a rough idea. However, I personally prefer to rely on common sense.
For example, we can observe that the number of nearsighted children in primary and secondary schools, and even kindergartens, is increasing, and the trend is becoming younger. This does not require any data; just observe the phenomena around you. Therefore, industries related to eye diseases (including but not limited to myopia) must have a high prosperity level. Following this logic, companies like Aier Eye Hospital and Opple Optoelectronics naturally fall within my investment target range; similarly, we can observe the use of dairy products around us, combined with China's population base, to judge the prosperity level of that industry, thus including Yili and others in the investment target range.
Competitive Landscape
A good industry is the foundation, but it also needs a good competitive landscape, just as a first-class school needs first-class teachers. So what is a good competitive landscape? In simple terms, it is a sufficiently high barrier (threshold); this barrier can be product-based, business model-based, or technology-based, meaning it is difficult for others to replicate and imitate.
Compared to the industry prosperity level, the competitive landscape is more challenging to judge intuitively through common sense and is mainly obtained through reading the prospectus and other materials.
Taking Opple Optoelectronics, which I currently hold, as an example, according to the description in the prospectus, "The brand concentration in China's rigid contact lens market is relatively high, with few competitors. Currently, besides the company holding the product registration certificate for orthokeratology lenses issued by the National Medical Products Administration, there are seven manufacturers exporting orthokeratology lenses to China, including three from the United States, one from Japan, one from South Korea, and one from the Netherlands, with one domestic manufacturer claiming to obtain the registration certificate for orthokeratology lenses soon. The company's main competitors are Euclid from the United States and Menicon from Japan." In a high-prosperity industry, there are only a few competitors participating, and further inquiries into relevant materials reveal that the company's products belong to Class III medical devices, and the technology level is on par with foreign brands, which is a combination of high industry prosperity and excellent competitive landscape that I personally favor.
Technological Changes
Previously, we mentioned that high industry prosperity + excellent competitive landscape = excellence. So how can we achieve perfection? The answer is slow technological change.
Taking Yili and Heng Rui Pharmaceutical as examples, both are very outstanding listed companies in their respective fields. By looking at the proportion of R&D investment to operating income over the past five years, we find that as one of the largest research and production bases for anti-tumor drugs, surgical drugs, and contrast agents in China, Heng Rui's R&D investment as a percentage of operating income has been increasing year by year, with a historical high of 15.33% in 2018, with an absolute amount reaching 2.67 billion yuan. The reason is that drug R&D is a field with very fast technological iteration; today's sweetie may be tomorrow's bull, and the R&D cycle is long with a high failure rate. To achieve technological leadership, high investment must be maintained, which is also the main reason I exclude pharmaceutical companies from my investment target range; the waters are too deep, and my personal ability is difficult to grasp, although I personally have great respect for innovative companies like Heng Rui.
In contrast, Yili, as the number one dairy company in Asia, has maintained its R&D investment as a percentage of operating income at around 1% over the past five years. Although this is partly due to the high revenue base, in absolute terms, it was only 460 million yuan in 2018. The reason is that the food industry does not belong to a field with very fast technological iteration; it is more about enriching and optimizing the product line, which is a relatively slow technological change industry that I personally prefer.
II. Business Analysis
Analyzing the company's business mainly focuses on understanding the company's business model, product lines, and product competitors. Among them:
Business Model
The so-called business model, simply put, is the way the company operates, the way it makes money, and the resulting influence in the industry chain. By understanding the company's business model, as investors, we can more clearly identify the points we need to focus on.
Example 1: Jieda Biological is a company engaged in the R&D and production of in vitro diagnostic products. Its business model is to drive reagent product sales through the sale (including gifting) of instruments, with the main profit point coming from reagent sales revenue. From this, we know that this company's products have both medical and consumer attributes, and the main focus should be on the deployment of instruments; only by continuously deploying instruments can subsequent reagent revenue be generated.
Example 2: Aier Eye Hospital is a company mainly engaged in the diagnosis and treatment of various eye diseases, surgical services, and medical optical fitting. Its business model is a national "graded chain," from which we know that we should focus on its chain expansion speed; only with sufficient scale can brand and service barriers be established.
Product Line
Listed companies have different ways of making money. Some companies rely on a single product to dominate the market, which brings concentrated risks; once product sales decline, the company will be in danger. Others have a rich product line, enhancing their ability to withstand risks while also testing the management team's comprehensive capabilities, as not everyone can achieve "Han Xin commanding troops, the more the better."
In my personal opinion, I prefer to invest in companies that start with a single product dominating the market and gradually enrich their product lines. Of course, during this process, it is necessary to keep a dynamic observation of the company's development, as ideals can be very full, while reality can be very skinny.
Competitors
Here, competitors refer more to specific product competitors. For example, Yili's product line is divided into liquid milk, milk powder and dairy products, and cold drink products. As investors, we need to sort out the specific competitive situation of each product line to further understand the company and deduce its future development trends.
Some investors may wonder how to obtain this information if they are not industry practitioners. Don’t worry; the company's prospectus and annual reports usually provide detailed descriptions. The key is that investors need to read carefully and diligently. If you master the prospectus and annual report, congratulations, you can basically score 80 points. If you are an investor with high standards and strict requirements for yourself, you can further check the website of the industry association where the company is located to challenge yourself for 90 points or even 100 points.
III. Financial Statement Analysis
The financial statements include the prospectus, quarterly, semi-annual, annual reports, regular announcements, and research reports, with the prospectus and annual report as core sources of information, focusing on the three statements (balance sheet, income statement, and cash flow statement).
There is much to say about statement analysis; I will express it in a separate article. Due to space limitations, I will only highlight the key points. Below, I will briefly discuss how to analyze the items in the financial statements, using Kweichow Moutai as the main example, combined with other listed companies.
Balance Sheet
I personally believe that the balance sheet is the leading document among all statements; profit and loss statements and cash flow statements are minor players in its presence.
On the asset side, focus on cash and cash equivalents, accounts receivable, prepaid accounts, inventory, goodwill, and fixed assets (including construction in progress); on the liability side, focus on interest-bearing liabilities (including short-term loans, long-term loans, and payable bonds), accounts payable, and advance payments.
Pay attention to cash and cash equivalents to analyze whether the company genuinely has real cash. Some companies boast about how excellent their business is and how popular their products are, but the cash on the books is pitifully low; such companies are mostly just boasting.
Pay attention to accounts receivable, prepaid accounts, accounts payable, and advance payments to analyze the company's position or bargaining power in the industry chain. Companies with high positions in the industry chain generally show fewer accounts receivable and more advance payments, as they have sufficient bargaining power over downstream (distributors); fewer advance payments and more accounts payable indicate strong bargaining power over upstream (suppliers).
Pay attention to inventory to analyze whether the company faces the risk of unsold goods; this item applies to manufacturing industries, while service industries generally do not need to consider it.
Pay attention to fixed assets (including construction in progress) to analyze whether the company belongs to a heavy asset industry and whether performance generation requires continuous investment in assets (occupying funds). For example, the port and airport infrastructure industries are typical heavy asset industries, with large investments and long recovery periods. Once the first phase is completed, there will be a second phase, followed by N phases, which is an industry I personally do not favor; Aier Eye Hospital, as a service industry, is a typical light asset industry, primarily relying on doctors, brands, and other resources to generate income, which is an industry I personally prefer.
Pay attention to goodwill to analyze whether the company's development focus is primarily on internal growth or external mergers and acquisitions. Over the past year, many listed companies have reported significant goodwill impairments, causing investors to be wary of goodwill. However, I personally believe that there is no need for concern; goodwill essentially refers to the portion of the purchase price that exceeds the fair value of the acquired company, i.e., market premium. Mergers and acquisitions are a normal market behavior and one of the means by which almost all world-class companies grow. Whether the acquisition price is high or low is subjective and requires specific company analysis; the key point is not the acquisition price itself but the quality of the acquired company. My overall attitude toward goodwill from acquisitions is cautious but not dismissive.
Pay attention to interest-bearing liabilities to analyze the company's use of financial leverage and to indirectly verify the company's cash position. From the perspective of financial leverage, I personally prefer companies with low or no interest-bearing liabilities and reject those with high leverage ratios (excluding financial companies, which rely on high leverage to operate). Conversely, if a company has a high position in the industry chain, its ability to generate cash must be strong, so it does not need to operate with high leverage; from the perspective of indirectly verifying cash position, if a company has a lot of cash on its balance sheet and also has a lot of interest-bearing liabilities, meaning large deposits and large loans, one must be highly vigilant. In real life, who would put money in the bank while taking out loans, then lose on the interest spread? Either they are out of their minds, or the cash is fake (for specific operations, please learn from Kangmei Pharmaceutical).
From the simplified balance sheet of Kweichow Moutai in 2018, we can see:
The largest component of the company's assets is cash (about 70%), which is simply speechless. There are no accounts receivable (zero), but there are quite a few advance payments (about 32%), meaning that distributors wanting to stock goods must not only not be allowed to owe money but also must pay in advance. Prepaid accounts (about 1%) are mainly government land guarantees, and accounts payable (about 3%) are all for goods, indicating that the company also has strong bargaining power over suppliers. Inventory is 23.5 billion yuan, about 15%; if it were a regular company, this value would be worth paying attention to, but don't forget that the company's product is liquor, which has aging; therefore, inventory is not a concern. The more there is, the more potential income there is for the coming year. Goodwill is zero, indicating that the company relies entirely on internal growth, which is related to industry characteristics. Interest-bearing liabilities are zero, which is normal; as a cash cow, it has much more money, so it naturally does not need to borrow.
From a comprehensive view of the balance sheet, Kweichow Moutai is a company with only cash and items that can be converted into cash (inventory) and tools for future production of cash (fixed assets), apart from that, there is nothing else, which makes other companies feel inadequate; it is simply a god-like company.
Of course, readers should be reminded that this is just a brief explanation of the framework and thinking for financial statement analysis using Moutai as an example; specific analysis of investment targets still needs to be combined with specific details and company operations.
Income Statement
The income statement reflects the company's operating situation. In the income statement, focus on operating income, operating gross margin (calculated), and the proportion of four expenses to revenue (calculated).
Pay attention to operating income to analyze the composition of the company's main business; this needs to be combined with the operating income detail table.
For example, Xiamen Port Authority intuitively appears to be a traditional port enterprise, but if you analyze its revenue composition, you will find that port logistics business accounts for only 30%, trade business accounts for 68%, and other businesses account for 2%, meaning that from a revenue perspective, Xiamen Port Authority is a trading company rather than a port company.
Pay attention to gross margin to analyze the industry's difficulty level.
For example, Gree Electric's gross margin in 2018 was about 34%, Midea Group's gross margin was about 29%, and Qingdao Haier's gross margin in mainland China was about 32%. The top three companies in the home appliance manufacturing industry have an overall gross margin of about 30%, which is the result of decades of fierce competition that has established the leading companies' positions. The situation of other smaller companies can be seen, indicating that this industry is still relatively tough, and the competition is intense. In some industries, such as the medical industry, gross margins can reach over 50%, indicating that overall, it is relatively easier to operate.
Pay attention to the proportion of the four expenses (selling expenses, management expenses, R&D expenses, and financial expenses) to analyze the driving factors of the company's performance.
For example, Aide Biological, a company whose main business is the R&D, production, and sales of precision medical molecular diagnostic products, and provides related testing services, had R&D expenditure as a percentage of revenue of about 18% in 2018. From this indicator, the first impression is that it is a R&D-driven company, but if we analyze further, we find that the selling expenses account for about 39% of revenue (far exceeding the industry level), which is more than double the R&D expenditure, and the bulk of the selling expenses is market promotion costs (about 80 million yuan, accounting for 45%, this expense is very deep, you understand), thus, in this sense, it is more accurate to say that Aide Biological is a sales-driven company rather than a R&D-driven one.
From the relevant data organized from Kweichow Moutai's 2018 income statement below, we can see:
The main product of Kweichow Moutai is Moutai liquor, accounting for about 90%, with a very clear main business. The gross margin reached an astonishing 94%. Please note that in the A-share market, there are quite a few companies with gross margin levels above 90%, such as Shutaishen in the medical industry (the core product Su Tai Sheng has a gross margin of 96%), but the gross margin levels of these companies are generally unsustainable because these companies share common characteristics: they are small, have a single product, and are in fiercely competitive markets. In the process of becoming leading companies in the industry, they need to pay a high price in sales expenses (Shutaishen's sales expenses as a percentage of revenue reached 60%) to support high gross margin levels. As the company continues to grow and the internal product line continues to enrich, external competition intensifies, and gross margins are likely to decline. Kweichow Moutai, on the other hand, has become a top industry player and reached a super-large market capitalization, with sales expenses as a percentage of revenue of only 3.5%, meaning that to maintain product market sales and prices, the company does not need to pay a high price in marketing expenses, which highlights the difference in industry position (the same industry Yanghe shares this value at 11%, while Yili in the food industry has this value at 25%).
Cash Flow Statement
The cash flow statement is a concentrated reflection of the company's cash flow. In the cash flow statement, focus on cash received from sales of goods and services and its ratio to operating income (calculated), net operating cash flow, and its ratio to net profit (calculated).
Pay attention to cash received from sales of goods to analyze the cash generated by the company through sales activities; its ratio to operating income reflects whether the operating income can be genuinely converted into cash.
Pay attention to net operating cash flow to analyze the cash generated by the company through operating activities; its ratio to net profit reflects whether the net profit can genuinely be converted into cash.

From the simplified cash flow statement of Kweichow Moutai in 2018 below, we can see:
On the cash inflow side, cash received from sales of goods accounts for 94% of total operating cash inflows, indicating that the company's cash inflow mainly comes from its main business; its ratio to revenue is 1.14, indicating that operating income not only converts entirely into cash but also has additional advance payments. On the cash outflow side, cash paid for purchasing goods accounts for only 11%, corresponding to the company's high gross margin; the largest outflow is tax payments (66.79%), which also indirectly confirms the authenticity of revenue. In terms of net cash flow, the ratio to net profit reached 1.09, indicating that the quality of the net profit achieved by the company is very high, genuinely converting into cash.
4. Core Financial Indicators
Core financial indicators mainly focus on weighted net asset return rate, which reflects the return rate that shareholders can obtain from the capital they have accumulated. This indicator is very important and deserves a dedicated article; due to space constraints, I will briefly explain it here.
Weighted net asset return can be broken down into the product of operating net profit margin, total asset turnover, and equity multiplier, representing the company's revenue level, asset turnover efficiency, and leverage usage level.
In 2018, the company's weighted net asset return rate was 34.46%, composed of an operating net profit margin of 49.00%, total asset turnover of 0.52, and an equity multiplier of 1.44. The entire combination has a net profit margin close to 50%, which is at an invincible level. The equity multiplier of 1.44 indicates that the company uses financial leverage, but please note that this leverage is interest-free, meaning it occupies other people's money without cost. The worst-performing indicator is total asset turnover, which is only 0.52 times, meaning that 1 yuan of assets can only generate 0.52 yuan of revenue; however, please note that the reason for this result is that the company has too much cash. Yes, too much cash; 70% of the company's assets are cash, and they are lying in the bank, leading to low asset operational efficiency. Having too much cash can also be a problem, which is quite unfortunate. In fact, solving this problem is simple: just two words: distribute money.

It should be noted that analyzing a company's financial statements is a multi-dimensional, interconnected, and mutually verifying process. The listed companies used as examples in the above analysis are just one angle of analysis; however, one cannot directly draw conclusions based on just one angle.
IV. Comprehensive Evaluation
In terms of comprehensive evaluation, I generally evaluate the company from four dimensions: strengths, weaknesses, opportunities, and threats. The first two dimensions stand from the internal perspective of the company, while the latter two dimensions stand from the external perspective. That is, what are the company's advantages, including technology, products, and business models, relative to peers? Correspondingly, what are its weaknesses? Combining the industry's prosperity level and competitive landscape, where do the company's opportunities lie? Correspondingly, what external threats exist? The purpose of doing this is to comprehensively view the company we want to invest in from a macro perspective, ensuring we have a clear understanding and avoiding generalizations.
For example, through a series of analyses of a listed company like Jieda Biological (SH.603387), my comprehensive evaluation is as follows:
Overall, Jieda Biological's advantages lie in its strong competitiveness of core products, strong bargaining power over distributors, and product quality level comparable to foreign giants, with a good asset situation; its weaknesses lie in the need to further improve product technology R&D levels and results (currently mainly based on immunofluorescence technology, focusing on the mid-to-low-end market, reflected in the market aspect with a higher proportion of secondary hospitals and a lower proportion of tertiary hospitals), FDA certification and EU certification have not yet been obtained, the product structure is relatively single, the ability to withstand risks is poor, and the layout in new fields has not yet effectively intervened (such as in the molecular diagnostic technology field); opportunities lie in the fact that the company is a leader in a niche field, and its products are all in the industry growth stage (even the company's core cardiovascular products are still at the front end of the growth stage), with an overall market share that is not high, and the market share is still occupied by foreign giants. In the future, with the gradual implementation of domestic substitution, further improvement of product technology, and gradual landing of national graded diagnosis and treatment, the company is expected to gain more development space; threats lie in the entry of peers (such as Wanfeng and Mingde) into the core product field (cardiovascular), and how to balance consolidating existing core advantages and enriching product lines will test the company's strategic goal formulation and implementation.
This is the amateur version of the company analysis framework. What do you think, @不明真相的群众？
Disclaimer: The listed companies mentioned in this article, such as $Kweichow Moutai (SH600519)$, $Gree Electric (SZ000651)$, $Yili (SH600887)$, Midea Group, Qingdao Haier, Opple Optoelectronics, Xiamen Port Authority, Shutaishen, Heng Rui Pharmaceutical, Aier Eye Hospital, Jieda Biological, Aide Biological, and Kangmei Pharmaceutical, are for illustrative purposes only and do not constitute stock recommendations or formal evaluations of the companies.

4. Five Steps to Initially Understand a Listed Company#

Buffett said: In stock market investment, you must learn two subjects: the first is how to value a company, and the second is how to cope with market fluctuations.
As a stock market novice, ensuring that you pass both subjects requires first understanding the companies you invest in; only by understanding the companies can you give reasonable valuations; only by understanding the companies can you remain calm in the face of price fluctuations.
Over the years, I have summarized a five-step approach to understanding a company.
Before introducing this five-step approach, I would like to apologize to Xueqiu and @不明真相的群众: I have been using the Dongfang Wealth client for a long time, and this method also relies on the support of Dongfang Wealth's client. During the introduction, I will widely refer to some functions of Dongfang Wealth that are not currently available on Xueqiu. Therefore, I hope the abbot and Xueqiu will forgive me. I love my ball, and I also love the truth.
Step 1: Choose a company within your knowledge range that you can understand
To put it grandly, it is to find your own circle of competence. Only you know this circle of competence. For example, if you graduated with a computer major, you can easily see various advanced technologies like 5G, software, and networks, which Buffett does not possess. Clearly, I do not have such abilities. However, I have my own circle of competence.
For example, I grew up in a rural area, and my family raised thousands of laying hens and dozens of meat pigs, so I naturally know the cycles of the breeding industry and understand the vaccines, cycles, and feeds involved in the breeding process; therefore, I can easily understand Wens Food. Although many people look down on a pig-raising company being a leading company on the Growth Enterprise Market, I know that achieving an annual breeding of 800 million chickens and 20 million pigs is difficult, remarkable, and very profitable.
Another example is that my first job after graduating from university was at a state-owned bank, and my work involved drafting speeches for leaders, so I am very familiar with the bank's strategy, business, products, and development direction. The dizzying data of the bank, which confuses others, feels very familiar to me.
After leaving the bank, I went to a brokerage firm, so I basically understand the business characteristics of a brokerage and the future development direction of brokerages. Therefore, I am optimistic about Dongfang Wealth and CITIC Securities. Of course, I also know that the core capabilities of an old brokerage are not so easy to disappear, so I am also optimistic about China Galaxy, which is extremely undervalued in the Hong Kong stock market.
The A-share market has dozens of industries and thousands of listed companies; first, use the elimination method to find companies within your circle of competence, narrowing the research targets to dozens. This is the first step in understanding a listed company.
Step 2: Understand the company's history and characteristics
After narrowing the target range to your circle of competence, officially start the process of getting to know the company, understanding its background, history, characteristics, and management team. At this point, it is best to leverage the powerful data functions of the Dongfang Wealth client.
Taking Wens Food as an example, open the Dongfang client, go directly to Wens Food, and click on the information column to see the must-read for operators, company overview, core topics, dividend financing, and other sections.

It is recommended to focus on reading core topics: In this section, Dongfang has detailed the business characteristics, main business, and affiliated companies of the listed company, which can help you initially understand the company's business.
It is recommended to focus on reading dividend financing: Understand how much financing this company has done since its listing and how much it has distributed. I prefer companies that have less financing and more dividends; such companies generally have real profits and are generous to shareholders. For example, since Wens Food's overall listing through share exchange in 2015, it has distributed over 10 billion yuan in dividends in just three years, which can be proud in the Growth Enterprise Market; how can one not like it?
It is recommended to focus on reading the prospectus. The prospectus provides the most detailed introduction to a company's history, shareholder structure, industry position, and development trajectory. After getting a preliminary understanding of a company through the Dongfang client, it is advisable to download the company's prospectus and read it carefully to understand its development history. By studying the development history, one can understand whether the company's strategy has been consistent and whether its execution capability is strong. For example, by looking at Wens Food's prospectus, one can learn about the company's entrepreneurial history, understand the contributions of the Wens family to the enterprise, recognize that the company's core competitiveness is employee stock ownership, and realize that concerns about the wave of employee stock ownership unlocking will dissipate.
During this process, if you find that a company's strategy is constantly changing and that dividends are scarce while financing is abundant, you can basically rule it out.
Step 3: Handwrite the core financial data of the company over the past ten years
This step is crucial for understanding the company. The reason for choosing to handwrite is that only by writing down each figure can you calm down to understand these data; at the same time, the recording process is also the process of thinking. By recording and contemplating these financial data, you can determine whether this is a cyclical enterprise or a growth enterprise; you can grasp which financial indicators are the most core and critical.
Core financial indicators include revenue, profit, ROE, and the three expenses. These data can be found in great detail in the financial analysis section of the Dongfang client.
For example, by handwriting Wens Food's financial data, you can find that although pig farming is a cyclical industry, it is a growth enterprise because its pig output is rapidly increasing every year, revenue is growing rapidly every year, and ROE has consistently been above 20%, sometimes reaching 50%. Although profits may fluctuate cyclically, once the bottom of the cycle is passed, explosive profit growth will occur.
By handwriting Dongfang Wealth's financial data, you will find that this company has been very precise in every round of transformation, and its execution is very strong, recognizing that it is a truly practical growth internet company.
By handwriting Dongguan Holdings' financial data, you can find that this low-key state-owned enterprise has actually achieved positive growth in revenue and profits for ten consecutive years, with ROE maintaining above 15% in recent years. Such excellent financial data, while the PE has always been below 10 times, gives you confidence in holding.
By handwriting the financial data of Shanxi Fenjiu, you can find that although the liquor industry is a unique evergreen industry in China, it does not mean that the enterprise can remain evergreen. Shanxi Fenjiu is also a well-known enterprise, but during the white liquor winter in 2012, its operating data regressed severely, far exceeding Moutai and Yanghe, indicating that this enterprise does not have a deep moat and growth potential.
The following image is a screenshot of the financial data of Liaoning Chengda that I handwrote over ten years. By handwriting these data, I understood that the revenue of this enterprise is not important; investment income is crucial; financial expenses and asset impairment data are very important, etc.
In fact, I have not fully explained the significance of handwriting financial data. But remember, you must handwrite the core financial data for ten years; during the writing process, you will think about why this data increases or decreases, then find the reasons, and gradually understand the enterprise. The reason for ten years is that too short a time cannot reveal the true nature of a company, while too long a time is exhausting and not very meaningful.
After understanding, you will see that some enterprises do not have strong competitiveness, such as Shanxi Fenjiu; some enterprises have the hope of turning around, such as Liaoning Chengda.
Step 4: Understand the management team of the enterprise
Of course, I believe that not all companies' management teams need to be understood. For example, the management team of state-owned enterprises does not need to be overly concerned; I still do not know who the management teams of Dongguan Holdings and Yantang Dairy are. However, for private enterprises, the management team needs to be well understood, such as Dongfang Wealth and Wens Food.
First, understand whether the management team holds shares or increases their holdings. For private enterprises, holding shares and increasing holdings are trust votes cast by the management team. For example, even during the bull market of the Growth Enterprise Market in 2015, when Dongfang Wealth's market value reached 200 billion, the management team did not reduce their holdings. Given their understanding of the stock market, they are not unaware of the high valuation; rather, they are focused on running the enterprise, which is a sign of determination. For example, when Wens Food's market value fell below 100 billion in 2016-2017, the management team was increasing their holdings every day.
Second, understand the personal characteristics of the management team. This requires searching for various fragmented articles online or even personal insights. For example, when you learn that the chairman of Dongfang is actually the first-generation successful stock commentator in A-shares, you can understand why Dongfang has succeeded; a company owner who was active in the media back then but has since disappeared can indicate that he is genuinely focused on doing the work. For example, when you see the Wens family struggling to start a business with eight households and nine shares, you will understand the contributions of the Wens family and employees' stock ownership to Wens Food's core competitiveness, and concerns about the wave of employee stock ownership unlocking will dissipate.
Third, if it is a state-owned enterprise, it is advisable to read the annual report's address. If the address is well-written and logically clear, it basically indicates that the management team is relatively reliable.
Step 5: Analyze the company's future
The future of the company is the aggregation of the future of each major product under the company's operations.
What is the market space for the product? What is the volatility of the product market?

SWOT analysis is a good tool. SWOT refers to the current environment, what opportunities and threats exist in the industry? What advantages does the company have to seize these opportunities? What disadvantages prevent it from seizing opportunities and instead negatively impact it during industry changes?

A company is like a person; its business, industry, and inherent characteristics determine its traits, which determine how high it can develop or how low it can fall, depending on its position and the resources it possesses, along with a bit of luck.

When looking at something, if I can only see its good side, I will choose to continue observing; until I see its bad side, and this bad side happens to be caused by its good side, I can objectively evaluate the matter and make a judgment.

My personal experience is limited, and there are certainly shortcomings. Here, I hope to throw out a brick to attract jade and welcome everyone to provide their views and how to improve this framework.

Extended Reading:

The fundamental analysis of Tong Ren Tang: The company's future (this is a series)

My Investment Framework: 70 Questions for Stock Selection#

As an investor, you should have your own investment framework. However, I have been confused for a while about what an investment framework is. Here, I will briefly introduce my investment experience. In the past, I looked at things narrowly and in detail, often not knowing what the key points were, and not knowing where to exert effort. Therefore, I often spent too much time on unnecessary details, but the results were not very good. Later, a senior suggested that I broaden my perspective, so I spent time on a wide range of stocks, but I didn't look deeply. However, it cannot be denied that reading broadly does not mean it has no effect; looking at many stocks can indeed cultivate a sense of finding the shining points of individual stocks, and stock selection becomes more thoughtful. However, I faced a new problem: some individual stocks felt good after looking at them, but how good they were, I actually had no confidence. After reflecting, I thought that my work was not detailed enough. Although I knew what the key points were and where to exert effort, it was superficial and not solid. Later, I felt that if I wanted to continue improving, I needed to go through a process of focusing back from broad to narrow, and this process is to enrich my thinking. I need to use a series of arguments to support my stock selection thinking.
In short, one sentence: Enriched arguments + stock selection thinking is the investment system. Both are indispensable; one is the framework, and the other is the flesh and blood.
This article's purpose is to propose 70 questions under the guidance of stock selection thinking to enrich it. Only by doing this and practicing can it be called an investment framework. These 70 questions are certainly not exhaustive, and there will definitely be important aspects missing. I welcome everyone to point out and supplement. Moreover, what conclusions can be drawn from these 70 questions is probably subjective.
In the future, every time I look at a stock, I must go through these 70 questions; if I haven't gone through this step, I am strictly forbidden to make any buying or selling decisions.

(1) Company Operations Section
1.1 Procurement

What is the proportion of raw materials in total costs and its trend over the past few years?
How is the company's procurement concentration? What is the proportion of the top five suppliers?
What is the payment method for the company's procurement, cash or with a certain credit period, and how long is it?
How far is the procurement location from the company, and how high are the logistics costs?
What proportion of the procurement amount accounts for the supplier's and the entire industry's revenue?
Note: If the proportion is large, the company will have a certain bargaining power; if the proportion is small, the company will have no bargaining power. For example, if a company’s upstream is a bulk commodity, and the company's proportion is small, the price fluctuations of the upstream will have little correlation with the company's demand; when the upstream price drops, it may be a benefit for the company.
1.2 Storage
How high are the storage costs of the company?
Does the inventory have a shelf life, and how long is it?
What are the proportions of raw materials, work-in-progress, and finished goods in inventory?
How is the company's inventory turnover rate?
Note: The inventory turnover rate of raw materials affects the company's profitability changes. For example, in the case of Luyuan, the raw cotton inventory generally has a half-year shelf life; if the cotton price fluctuates greatly within half a year, it will affect Luyuan's profitability. On the other hand, the turnover rate of finished goods affects the company's cash flow and can reflect the sales situation of the company.
Is there a significant risk of inventory depreciation?
Note: Different products have different depreciation risks. For example, women's clothing has a higher risk than men's clothing; perishable food also has a higher risk; while liquor has relatively low risk.
1.3 Production
How long is the company's production time?
Note: This refers to how long it takes for the company to turn raw materials into finished products. The longer the time, the greater the operational risk, such as in the shipbuilding industry.
How is the efficiency of the company's production personnel? What is the per capita income and per capita output? How high is the degree of mechanization? Is there a possibility of improving efficiency?
What is the trend of the company's capacity utilization rate over the past few years and the reasons?
How does the change in capacity utilization affect the elasticity of performance?
How is the company's product structure? Boston Matrix analysis.
What proportion does depreciation occupy in the company's production costs? Generally, companies with high depreciation are more likely to achieve economies of scale.
What is the trend of marginal investment in the company's capacity expansion? Can personnel matching have economies of scale? What is the speed of capacity expansion?
Note: In some industries, marginal investment in capacity expansion is decreasing, such as in electronic components; in others, it is difficult to achieve, such as in heavy industries. In some companies, personnel matching can achieve economies of scale, such as in the Electric Power Research Institute, where capacity continues to expand while the number of operators remains relatively stable; in others, new hires must be made to achieve this, which makes it difficult to form economies of scale and affects speed, as recruitment, training, and proficiency all take time.
1.4 Sales
How is the company's sales method? What is the proportion of direct sales and distribution, and what is the proportion of sales methods such as supermarkets, circulation, and bulk?
How is the customer concentration of the company? What is the proportion of the top five customers in total revenue?
How is the company's sales network? Is it regional or national, and is the sales situation distributed evenly across the network?
What is the settlement method between the company and downstream distributors?
How is the hierarchy of the company's distributors? That is, how many links are there from the company to the end consumer, and how is the inventory situation at each link?
What is the company's sales strategy? Is it low-margin, high-volume, or focused on high-end maintenance of high gross margins?
How is the company's sales efficiency? What is the per capita output of sales personnel and the average output of distributors? Can economies of scale be achieved?
Note: If product extension can be achieved, economies of scale can be generated in sales channels and sales personnel, such as in the one-stop sales of Goer Acoustic, or channel sharing in Shanghai Jahwa, many pharmaceutical companies can also easily form sales economies of scale.
How is the sales radius of the company? How high are logistics costs? Is it necessary to build factories in different places to reduce sales logistics costs?
How is the situation of the company's sales targets? Is it homogeneous or diverse? How urgent is the demand from the demand side for the company's products? What proportion does the company's sales account for in the demand side's procurement? How is the company's pricing power?
Note: The more homogeneous the industry, the better for the company; for example, system integrators are generally not as good as software companies; the more urgent the demand from the demand side for the company's products, the more room there is for the company's gross margin to improve; the smaller the proportion of the company's sales in the demand side's procurement, the more room there is for price increases.
How is the switching cost for the company's sales targets?
Note: Industries with high switching costs can have certain barriers and moats because downstream customers will incur additional costs if they change suppliers; however, at the same time, such industries also find it difficult to increase their industry concentration. For example, in the plastic flexible packaging industry, there are certain switching costs for downstream, and the leader Yongxin's operations are very stable, but as a leader, it has always been difficult to increase market share.
1.5 Investment
How is the company's capital expenditure situation? What is the proportion of investment in net profit and operating cash flow in recent years?
What is the structure of the company's investment expenditure? How much is for self-built fixed investments, and how much is for external mergers and acquisitions?
How is the source of the company's investment funds? How much is from bank loans? How much is from equity financing? How much is from self-generated