Twelve questions to answer before buying any stock — business, moat, management, financials, valuation and risk — with the disqualifying answers spelled out.

A stock selection process is not a formula. It is a sequence of questions where a bad answer stops the process. The value of a checklist is that it makes you stop, rather than letting enthusiasm carry you past the problem.

Work through these in order. Any disqualifying answer ends the analysis. There are roughly 5,000 listed companies in India; you can afford to be dismissive.

Part 1: The Business

Question 1 — Can I explain how this company makes money in two sentences?

Not what it does. How the rupees arrive. Who pays, for what, how often, and what happens if they stop.

If you cannot do this without reading the investor presentation again, you cannot value the business, and you certainly cannot hold it through a 40% drawdown.

Disqualifier: the answer requires jargon you cannot unpack.

Question 2 — Is the addressable market growing, and is this company growing faster than it?

A company gaining share in a growing market has two tailwinds. One losing share in a growing market has a hidden problem the revenue line is masking.

Check volume growth separately from value growth. Revenue rising purely on price increases in an inflationary period is not the same as demand growth.

Disqualifier: shrinking market with no evident share gains.

Question 3 — What stops a competitor from doing this tomorrow?

The moat question. Real durable advantages in Indian markets tend to be:

• Switching costs — enterprise software, banking relationships, B2B components designed into a customer’s product
• Network effects — exchanges, marketplaces, payment rails
• Cost advantage — scale, integrated operations, captive raw material
• Brand and distribution — decades of trade relationships that a well-funded new entrant cannot buy quickly
• Regulatory position — licences, approvals, long-cycle certifications

Disqualifier: the honest answer is “nothing, but they’re currently the biggest”.

Question 4 — How cyclical is this, and where are we in the cycle?

Cyclicals look cheapest at peak earnings and most expensive at the trough. Getting this backwards is the most common valuation trap in commodities, autos, capital goods and real estate.

Disqualifier: you cannot tell where in the cycle you are.

Part 2: The Management

Question 5 — What is the promoter’s track record with minority shareholders?

Read five years of related party transactions. Look for loans to promoter entities, royalty or brand fees, guarantees given for group companies, and sales or purchases at unverifiable prices.

Then check whether past guidance was met. Read four earnings calls; compare what was promised two years ago against what was delivered.

Disqualifier: a pattern of value moving to promoter-owned entities.

Question 6 — Is promoter holding stable, and is any of it pledged?

The quarterly shareholding pattern on NSE and BSE shows both. Falling promoter stake over several quarters without a stated reason, or significant pledging, is a genuine risk — pledged shares can be sold by lenders precisely when the price is already falling.

Disqualifier: high or rising pledging combined with a weakening share price.

Question 7 — Has the auditor or CFO changed recently, and why?

Auditor resignations mid-term, replacement of a large audit firm by a much smaller one, or repeated CFO churn are among the strongest warning signals available to a public shareholder. Listed companies must disclose the reasons — read them.

Disqualifier: an unexplained auditor exit.

Part 3: The Financials

Question 8 — Does profit convert to cash?

Sum five years of net profit. Sum five years of cash flow from operations. If CFO trails PAT materially, the profits are held in receivables, inventory or capital work in progress rather than in the bank.

Then compute free cash flow (CFO − capex). Businesses that never generate free cash are consuming capital to grow; that is acceptable only if returns on that capital are high.

Disqualifier: five-year CFO well below five-year PAT with no clear explanation.

Question 9 — What is the return on capital employed, over five years?

ROCE = EBIT ÷ (Total Assets − Current Liabilities). Consistently above 15% suggests the business earns a genuine return on the money invested in it. A single good year means nothing; the pattern across a cycle is the signal.

Cross-check ROE using the DuPont breakdown to see whether it is driven by margins and efficiency or by leverage.

Disqualifier: ROCE persistently below cost of capital.

Question 10 — Can it survive a bad two years?

Check debt-to-equity, interest coverage (EBIT ÷ interest expense — below 3 is a concern), net debt to EBITDA, and contingent liabilities in the notes.

Then ask: if revenue fell 30% for eight quarters, does this company get into trouble? Highly leveraged businesses do not get the chance to recover.

Disqualifier: interest coverage below 2, or contingent liabilities exceeding net worth.

Part 4: Price and Risk

Question 11 — What am I paying, and what does that price assume?

Reverse the question. Instead of asking whether a P/E of 45 is justified, work out what growth rate the current price implies, then judge whether that is plausible for a decade.

Compare P/E, EV/EBITDA and P/B against the company’s own five-year history and its closest listed peers — never across sectors.

Disqualifier: the price only makes sense under assumptions you would not defend out loud.

Question 12 — What would make me sell, and how much am I risking?

Write the exit conditions before you buy: thesis break, margin deterioration beyond a threshold, governance event, better opportunity. Without this, every future decision is emotional.

Then size the position: 5–8% maximum for a single stock in a non-professional portfolio, 25% maximum for a sector. Adjust downward for anything below large cap.

Disqualifier: you cannot articulate what would prove you wrong.

A Note on Where the Idea Came From

Screeners, annual report reading, supplier and customer observation, and management commentary are legitimate sources. So are other people’s ideas — provided you re-derive the thesis independently.

What is not legitimate is acting on tips from unregistered sources. SEBI’s January 2025 circular restricted regulated entities from associating with unregistered finfluencers, and enforcement has followed, including a December 2025 order impounding ₹546 crore against an operation SEBI found was providing unregistered advisory and research services under the label of education. Before paying anyone for recommendations, check their registration number on the SEBI intermediaries list.

The Checklist, Condensed

Frequently Asked Questions

How many stocks should I hold?

Ten to fifteen for most non-professional investors. Fewer concentrates risk beyond what most people can tolerate; more exceeds what most can actually track.

How long does this take per company?

Four to eight hours for a first pass, done properly. That friction is a feature — it prevents impulse buying.

Can I skip steps for a large, well-known company?

Size reduces some risks, not all. Questions 8 through 12 apply regardless.

What if a stock passes everything but the price?

Add it to a watchlist with a target price. Good businesses at bad prices become good investments at some point; bad businesses do not.

Sources and Further Reading

• NSE and BSE corporate filings and shareholding patterns
• SEBI intermediaries verification — sebi.gov.in
• SEBI circular dated 29 January 2025 on association with unregistered entities