All You Need To Know
Anti Fragility In The Business
We constantly look for businesses which have survived through at least one downcycle. This gives us confidence in the underlying business model and its strengths. A strong balance sheet adds to this thesis, as in a downturn, it helps in survival, but in an economic upcycle, a strong balance sheet enables businesses to grab big opportunities.
Avoiding Highly Leveraged Business
In our view, over leveraging is the best way to sink a business and weaken its ability to adapt and capitalise on new opportunities. Hence, we avoid businesses that have a Debt to Equity ratio higher than 100%.
Avoiding Public Sector Enterprises
A public sector enterprise was incorporated to serve first and make profits later. Other than that, PSEs carry an inherent red tapism in their operational culture, which in our view, makes for inefficient use of resources.
Ability To Generate Incremental Returns
Apart from the basic screening on Return on Equity being greater than 15%, we also look for businesses that can replicate this return ratio on the incremental capital employed as well, as the ability to replicate returns shows the management’s ability of being able to find new avenues of growth for the business in a consistent manner.
Improving Operating Margins
We look at businesses that have an operating margin of atleast 15%, along with that operating margins should be improving, an industry high operating margin indicates cost efficiencies, process efficiencies, and many other competitive advantages.