Part 3: How to define a good business?

After the financial analysis of the company, let's move on to some fundamentals. First of all, ask yourself these few questions:

1. Do you understand the nature of the business?
2. So what is the nature of the business?

When you can answer the above 2 questions, this is the 3rd thing you need to take note:

3. Understand the management team
This is a tough one, because you will need to know where each director is from and the composition of the board of directors. It doesn't mean that with a strong and good management team, the business is good. Practically, it makes more sense to say that the good management team will promote more transparency in their actions. The recent bad news arising from S Shares was a good learning point, with unknown auditors, overstated cash flow, directors not doing their job etc.

4. Is the company focus in its core competencies or it is a jack of all trade but master or none?
If you understood the nature of the business and industry, you should be able to easily identify whether the company is a first mover, or a company that imitates other people's success.
Diversification is very common nowadays, with companies trying to leverage on other streams of revenue. So how many percent should diversification be considered? Based on academic studies, a diversification with contribution of 30% to the overall revenue of the company is considered a valid diversification. Are you able to identify any companies that falls in this category?
As far as I can find at the moment, Comfort Delgro fits in this category.

5. Brand leverage
Branding is a very powerful tool and investors should take note of this. You can simply think of a few great companies like Coca Cola or Apple, which literally dominate all over the world! Would you buy a non branded cola drink or you would pay more for a can of Coca Cola?