When first considering a company for investment, I look at three main things:
- Does the company have a product or service that will be in demand in the future?
- Does the company have a demonstrated history of success, and is it on solid financial footing today (i.e., a manageable debt load and strong cash flow generation)?
- Can I purchase the stock for a reasonable price?
If I can verify each of these things, I then look at how that company deploys its free cash flow to enrich shareholders. Companies can enrich shareholders by:
- Paying dividends
- Buying back stock
- Paying down debt
- Making acquisitions
If the company is wisely using cash to boost shareholder returns, I dig into annual and quarterly reports to gauge managerial competence, plans for future growth, and any red flags or areas for concern. Today I will go through this due diligence process as it relates to TJX Companies (TJX), and conclude with whether I decided to buy or not.
