How to analyze investment ideas: 7 practical steps

In the November 2024 issue of Investuok magazine (No. 11 (201)), Vitalij Šostak shared his insights on how to avoid getting lost in the overwhelming flow of information when investing. This requires a clear investment idea analysis process with defined steps that help in making well-reasoned decisions. The process should focus on using time efficiently and answering key questions: what we are buying (the company’s business characteristics) and at what price (whether the price paid for the business is reasonable).

Vitalij Šostak outlined 7 steps that help eliminate the majority of unsuitable investments and identify the best candidates for further analysis. At first glance, they may seem somewhat unconventional. You won’t find classic elements of investment theory here, such as the P/E ratio, earnings growth, dividend yield, and similar metrics. On the other hand, if we aim to achieve unconventional investment results, we need to do something unconventional.

7 key questions to answer:

• Does the company generate stable free cash flow?
• What is the free cash flow yield of the investment?
• How efficiently does the company manage its capital?
• Who are the company’s key shareholders and executives, and what are their actions?
• Specific risk factors: what don’t financial statements show?
• A provocative question: why has the company not been valued properly so far?
• An even more provocative question: why should the market value this company?

Detailed commentary on each step is available in Lithuanian (switch the page language to LT).