Thanks to @svsrikanth and @bhaskarjain on guiding on how to select stocks for portfolio building, specially, when you have to select top 10-20 from a basket of 50. I liked the idea of building some scorecard mechanism and came up with a version 1. Initially thought to post in my portfolio thread but this whole concept looks so interesting with so many points/queries, I thought , a separate threat to initiate a focused discussion with group can lead to interesting findings.
The logic of scorecard is to allocate a score of 100 to 6 parameters:
Historic Financial Performance : This tracks consistency of historical financial performance over last 5/10 years in terms of Revenue growth, EPS growth etc.
Financial Attractiveness : This tracks current or average of last 3 years to check financial attractiveness of firm like : leverage position, working capital requirement to run business, Free cash flow to profit business generates
Corporate Governance : Measures how ethical promoters have been to investors and as a company to overall market
Business Performance/Strength : What are the key strengths of business that stands out
Market Potential : What is the scope of future growth for company and industry?
Valuation Attractiveness : How attractively current share price is placed compared to valuation/financial performance
Under each of these 6 parameters, there are sub-parameters with sub-weights. For every sub-parameter, company gets a score on 1-10 based on its performance. The bench-marking of score for each sub-parameter is done currently on my own domain knowledge, however, i feel it needs lot of improvement on certain sub-parameters. Veterans who knows the numbers of multiple industries in and out can help here to build this more efficiently
Each company gets a score on 100 points on these 6 parameters.
I have tried to evaluate 2 companies though some of parameters still needs lot of research but it helps to initiate a healthy discussion.
My initial thoughts:
I have tried to keep the framework as quantifiable as possible through ways to quantify the qualitative aspects. There are some qualitative indicators also.
This is just 1st draft and there is lot of scope on 2-3 fronts:
a. Identify right KPI for each parameter
b. Ensure there is not too much correlation and there is mutual exclusiveness
c. Use personal research and groups domain knowledge to modify scoring logic on 1-10 scale for each sub-parameter
d. Finding Optimum weights for each parameter and sub-parameter
For emerging and established companies, scorecard should be dynamic (like same dividend yield rule may not be applied). Do we need dynamic scorecards based on industry, phase of business, different themes - consistency/turnaround story etc. etc?
A separate scorecard may be required for BFSI companies (due to difference in financial KPIs)
Scope of analytics and machine learning techniques to find optimum weight(me being in this field is doing some personal research now)
All said and done, this may be just an indicative quantifiable mechanism to help to take final individual decisions depending on individual qualitative assessment and understanding of business
@Donald, I have used one of your financial analysis excels built on screener and have combined with the one I had prepared for the same. Thanks a lot for keep enriching us with such stuff.
To all members, I open the thread for discussion. The idea is to build such a scorecard that if today I rank 100 companies on a score of 1-100 and after 5 years, I check returns given by these 100 companies, the GAP of RANK distance should be minimal. That will test the strength of framework. This can surely be back-tested going 5 years back and testing with today’s gain.
Note : Moderator, I am not aware of any such thread discussing this, in case, this is repetitive, please pardon and delete it,.
PI Analysis.xlsx (144.7 KB)
Kovai Analysis.xlsx (143.7 KB)