Objective & Concept.
I am summarising a concept Fundamental Analysis & Valuation Matrix. This matrix can be applied on laundry list of stocks, a pre screened list of stocks or a live portfolio etc. The objective is to find out a weighted average rank of lets say 20 stocks in a portfolio. The investor may decide to exit the bottom 30% and reinvest in top 70%. As a result will achieve a concentrated portfolio of 14 stocks which are better than rest.
Points of -1,0,1 may be given for Poor, Neutral, Strong outcome against each ratio which is left to standards or thumb rules like---- less than 12%, 12 to 25% , greater than 25%. Once points are put against each of 16 ratios, weightages can be applied to find parameter wise rank or overall rank. If one wishes can have any no of parameters, ratios or rating scale- a minimum basic of which is depicted.
Request feedback & suggestions on the concept. Kindly let know if this exercise will help in " separating the wheat from the chaff" at least at a historical performance level.
I appreciate your effort in putting together KPIs for stocks. Evaluating against metrics is always better than being subjective.
Couple of more parameters that could bring the valuation/ premium into perspective
- Overall size of the organisation
- Leadership position
Further, it would be good if you put up an example score card with about 5 stocks or so.
This is great matrix. Couple more matrix which can be added is
Also it would be great if some way you can share this in excel.
Good job Anupam. U seem to be learning quickly, assuming that u r a novice…as u mentioned somewhere.
-1 for below standard, -0.5 for data not available, 0 for standard, 1 for above standard, 1.3 for way above standard.
What about the future expected growth rate, and eps growth rate.
In 2000, MTNL would be looking great in these parameters as the past was excellent.
The future is here to see!
My 1st post at the begining- last line says its purely basis history
I would want your & other VP member inputs to make it forward looking as well.
Clearly the deficiencies are as below
- historical & not futuristic
- standards used flat across companies, industry which is rarely the case
- Aspect of peer/competition missing
- Industry growth/degrowth missing
Needs some conceptual thinking to incorporate the missing aspects.
However , without getting lost in the Jungle of Maths !!
Appreciate your efforts in trying to come up with a framework for analysing the performance of different companies. Also, good to see the initiative you’re taking to understand different sectors/industries in multiple threads.
My investing career is barely a couple of years old so you can totally choose to ignore my comments/advice. But I thought maybe I can share some of my thoughts which may put things in a different perspective for you.
Apart from a pure undervaluation/asset play/value unlocking investment strategy, every single company you invest in is totally based on your prediction of the future earnings of the company. Since stock prices are slaves of earnings. (Even for the undervaluation/asset play companies, any investment period lasting more than a few months ensures your thesis is based on the future earnings of that company remaining at least level with previous quarters/years - otherwise with reducing earnings it won’t remain undervalued for long )
Thus IMHO, I don’t think there exists/can exist any single framework involving numbers which can guarantee investment success. As any prediction of the future earnings requires putting in numbers based on assumptions which may or may not be correct.
Having a template is useful and nice to reduce re-organisation of similar information across companies and for quickly calculating their PAST Financial Health. However, believe me markets will be positioning >90% companies based on their future and not their past.
And everyone knows why the future is so difficult to predict. Here’s some of the obvious reasons:
- Every country is unique with unique characteristics (Economic environment, GDP growth, Demographics, Fiscal deficit, government policies, etc)
- Every industry is unique with unique characteristics (Industry growth, Profit margins, Regulation, Compliance, Competitiveness, Customers, etc)
- Every company is unique with unique characteristics (Business Models/Moat, Top Management, Revenue growth, PAT growth, Debt level, etc.)
And this doesn’t even include the vagaries of the market in terms of assigning different multiples to industries/companies based on sentiment, news flow, govt regulation, promoter background, etc.
With so many unpredictable variables it is nigh on impossible to come up with any remotely correct ‘one size fits all’ valuation framework.
My idea for you would be to have a broad level understanding of the industry. Based on that, study the individual companies in significant detail right from quantitative factors to qualitative (more important) factors. As each company has certain unique characteristics, try and understand those unique factors which would make it a worthy investment. Bunching so many companies together on a spreadsheet will never highlight the qualitative factors which makes one company a significantly better bet than the other.
We all believe in picking stocks based on magic formula investing (as one of the method). So we go for high ROE businesses…But why can’t we go for low ROEbusinesses available at cheap valuations…Here I want to say is…a company having low ROE (because low asset turnover ratios) can be a real good buy…let’s loom at waterbase and avanti…avanti has ROE of 50%+…waterbase has 25%+…asset turnover of avanti is 6.5 and waterbase is 3…opm for both is same…why shouldn’t I go for waterbase with a lower base (high growth potential) compared to avanti…now based on magic formula…I can find avanti…waterbase will be neglected…