While analyzing a company, a systematic approach to assess the Quality of Earnings is one of the important processes we follow to identify risks and minimize the chances of facing a permanent loss of capital.
The central idea in this example is “KYR” or “Know Your Risk”. Understanding risks can help in:
a. Furthering qualitative check on companies.
b. Bucketing companies along the “Certainty Curve”
c. Depending on risk appetite and mandate, position-sizing in the portfolio