Evaluating capital allocation checklist.xlsx

	A	B	C
1		Question	Why?
2	1	Where do you think the company is in its lifecycle?	Financing needs and assets use changes if a company is a startup, growing or in a mature phase. This step is needed to evaluate the next questions.
3	2	Is the company creating value? Has it been earning a ROIC higher than the cost of capital?	You need to know if the company has been destroying or creating value in the past, and compare it to where it is in the life cycle. If a more mature company has been consistently destroying value in the past years, it might signal a bad capital allocation strategy or too much competition.
4	3	How has ROIIC evolved over time?
5	4	How has the spread of compare to that of its competitors?	To check if it's only this specific company that is creating value or the entire industry.
6	5	How was the company financed in the past and how did they spend their cash	Go into the next questions for more detail
7	5a	Did they invest in operations for growth?	This is usually the way to go (see historical credit suisse data)
8	5b	Did they do acquisitions? If so, how have profit margins evolved?	When a company grows through acquisitions, is the company becoming stronger? (increased marings) or weaker (decreased margins).
9	5c	To they spend towards R&D? How much?	What has been the result or returns of R&D spending in the past?
10	5d	Did they strengthen their balance sheet?	If yes, why?
11	5e	Did they return cash to shareholders?	Buybacks? Dividends? Do they care about the intrinsic value of their own stock?
12	5f	Do all these past decisions make sense compared to where they are in their life cycle?	Always use the life cycle as a reference frame
13	5g	Has there been a shift in capital allocation strategy?	Look for changes in past capital allocation decisions. This could signal an adaptive strategy. A ne management team?
14	6	Does management openly discuss capital allocation decisions?	This can be an important clue to see if they understand it is important
15	7	What are their plans for the future?	Does management talk about the long term, about how they want to allocate capital in the future?
16	8	Are they sitting on a cash pile not knowing what to do?	This is not a good sign, but an important one to consider.
17	9	Does management admit past bad allocation decisions?	This would be a very good sign towards the existence of a continuous improvement cycle in allocation decision making
18	10	Does management know the difference between pricing and valuation?	This is crucial, especially if they are buying back their own shares.
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