Key Considerations from Common Stocks, Uncommon Profits by Philip Fisher for Evaluating a Company’s Potential

1. Market Potential

   • Does the company have products or services with significant potential to drive long-term sales growth?

   • Companies may succeed by being in the right industry (e.g., Aluminum Company) or by innovating continuously (e.g., DuPont).

   • Strong management is critical for both scenarios.

2. Commitment to Innovation

   • Is the management focused on developing new products or markets as existing ones mature?

   • Companies must anticipate and prepare for future growth challenges.

3. Research & Development (R&D) Effectiveness

   • How productive is the company's R&D relative to its size?

   • Examine past contributions of R&D to profits and sales.

   • Use insights from employees, competitors, and experts (scuttlebutt) to assess R&D impact.

4. Sales Efficiency

   • Does the company have an above average sales organization that drives repeat business?

   • Benchmark sales, advertising, and distribution efficiencies against competitors.

   • Leverage external insights to evaluate the training and selection of sales personnel.

5. Profit Margins

   • Are the profit margins healthy, or are they strategically low due to reinvestment in growth activities (e.g., R&D, promotions)?

6. Profit Margin Sustainability

   • Can the company sustain or improve margins by passing on costs or increasing operational efficiency?

7. Labor and Personnel Relations

   • Are employee relations strong, indicated by low turnover, minimal grievances, and competitive wages?

   • Non-unionized environments often reflect good personnel policies.

   • Pay close attention to wage scales.

8. Executive Relations

   • Are executives confident in leadership (e.g., CEO, board)?

   • Is executive compensation aligned with industry standards?

9. Management Depth

   • Does the company have a capable leadership team with proper delegation and succession planning?

10. Cost Control and Accounting

    • Does the company have effective cost analysis and accounting systems to identify and address inefficiencies?

11. Industry-Specific Advantages

    • Are there unique factors (e.g., strong patents, real estate management, credit handling) that give the company a competitive edge?

12. Profit Outlook

    • Does the company prioritize long-term profit growth over short-term gains?

    • Examine its relationships with customers and vendors.

13. Equity Financing and Dilution Risk

    • Will growth require significant equity financing that dilutes shareholder value?

    • Ensure the company’s cash flow and borrowing capacity are sufficient for near-term growth without excessive dilution.

14. Transparency with Investors

    • Does management openly communicate challenges as well as successes?

    • Avoid companies that withhold bad news.

15. Management Integrity

    • Assess if management acts in shareholders’ best interests (e.g., fair salaries, market-aligned property deals).

    • Avoid companies where insiders benefit unfairly through hidden transactions.

    
    

(Source: Common Stocks, Uncommon Profit, Chapter 3 - What to Buy)