Step 1: Does the Business Have a Sustainable Economic Moat?
Before looking at financial ratios, ask: Why can't competitors easily steal this company's profits? - Brand Moat: Pricing power where customers accept price hikes (e.g. Titan, Asian Paints). - Network Effects: Value increases with more users (e.g. BSE, CDSL, MCX). - High Switching Costs: Painful for clients to switch suppliers (e.g. TCS, Infosys). - Cost Advantage: Scale-driven low cost manufacturing (e.g. Tata Steel, Bajaj Auto).---
Step 2: The Essential Financial Health Check
Look at 5-to-10 year historical trends on screener.in: 1. Sales & Profit Growth: Has revenue and Operating Profit grown by at least 12-15% annually over 5+ years? 2. ROCE & ROE: Is Return on Capital Employed consistently above 15% to 20%? 3. Debt-to-Equity Ratio: For manufacturing/services, Debt-to-Equity should ideally be under 0.5. High debt during economic downturns leads to bankruptcy. 4. Operating Cash Flow vs Net Profit: If reported Net Profit is growing but Operating Cash Flow (CFO) is zero or negative, profits may be fake or stuck in uncollected receivables.---