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Financial Blog Corliss Group: 20 essential pre-flight checks for investors (1)

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"If checklists designed to focus on the most vital areas and cut out unnecessary distractions can help people stay alive, then they can surely be applied to the financial markets," said Russ Mould of AJ Bell, the investment shop. Mr Mould has come up with two checklists - one of warning signs, the other of positive aspects of a potential investment. – PowerPoint PPT presentation

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Title: Financial Blog Corliss Group: 20 essential pre-flight checks for investors (1)


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FINANCIAL BLOG CORLISS GROUP
20 Essential Pre-flight Checks for Investors
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  • The simple checklists used by pilots and doctors
    every day have saved countless lives. Use these
    investment checklists to avoid losing money.
  • On October 30 1935 an early test flight of
    America's first four-engine bomber, the Boeing
    B-17, ended in disaster when it nose-dived into
    the ground just after takeoff.
  • Overwhelmed by the number of different tasks
    involved in flying what was one of the most
    complex aircraft of its time, the crew simply
    forgot to check that a lock on the controls had
    been disengaged. Visit Corliss Group
  • The crash led to the development of the
    pre-flight checklist, which pilots around the
    world now use routinely to ensure that the plane
    is ready to fly in every respect before takeoff.
  • An American surgeon, Atul Gawande, realised that
    his profession also made mistakes by forgetting
    key tasks mistakes that could be avoided by the
    use of checklists. The introduction of these
    simple but vital to-do lists has saved
    countless lives in aviation, medicine and
    many other fields.
  • More published articles on Scribd

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  • When it comes to investing, checklists could save
    you a lot of money.
  • "If checklists designed to focus on the most
    vital areas and cut out unnecessary distractions
    can help people stay alive, then they can surely
    be applied to the financial markets," said Russ
    Mould of AJ Bell, the investment shop.
  • Mr Mould has come up with two checklists one of
    warning signs, the other of positive aspects of a
    potential investment.
  • First, check whether a company has any of these
    10 attributes, Mr Mould said. Any should give
    investors cause for concern.
  • 1. Is there a dominant chief executive or
    shareholder?
  • 2. Have there been frequent or transformational
    acquisitions?
  • 3. If there is a focus on growth, what exactly is
    the company trying to grow? Focusing on
    growth in "earnings per share" or EPS is a
    particularly worrying sign, Mr Mould said.
  • 4. Are there management bonuses that are
    triggered easily (usually via a level of EPS)?

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  • 5. Do the accounts regularly feature
    "exceptionals" and unintelligible footnotes?
  • 6. Is the profit figure significantly bigger than
    the amount of cash generated?
  • 7. Is interest cover the ratio of profits to
    debt interest less than 2?
  • 8. Is dividend cover (profits divided by
    dividends) less than 2?
  • 9. Does the company have a "mix of high
    operational and financial gearing"? Operational
    gearing means profits heavily depend on a
    particular level of sales, while financial
    gearing is simply having a lot of debt.
  • 10. Do returns on capital consistently fail to
    exceed the cost of capital?
  • Now, here are 10 aspects of a company that could
    make it worth considering.
  • 1. Is there "share price momentum"? A steadily
    rising price can indicate that investors are
    gradually waking up to a company's strength.
  • 2. Do the shares trade at a discount relative to
    the company's peers and the market?
  • 3. Is the company's market share on a rising
    trend?
  • 4. Is there a record of rising profits and
    dividends?
  • Read more articles from Corliss Group Blog

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  • 5. Have the company's directors been buying
    shares?
  • 6. Is the consensus among stockbrokers' analysts
    a "buy" rating? Try to focus on research that is
    certified as "independent".
  • 7. Are profit forecasts rising steadily?
  • 8. Is interest cover sufficient?
  • 9. Are there any activist investors or hedge
    funds on the shareholder register? This could
    indicate that the company is about to be shaken
    up, potentially freeing it from poor management
    or a record of operational mistakes.
  • 10. Is there a good standard of corporate
    governance? The chairman and chief executive
    should be separate and there should be strong
    non-executive directors.
  • - By Richard Evans
  • This article is from The Telegraph
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