We are doing Fundamental Analysis and our app is designed to lessen the complexity of individually scrutinizing a company’s financial statement.
We assess stocks based on various quantitative metrics across a range of assessment criteria, specifically Value, Past Performance, Future Performance, Financial Health and Dividend. Each of the criteria consists of 6 metrics that we check and a company may score 1 or 0 (pass/fail) for each check done, this also translates to a maximum of 30 assessment score a company may get. The results are then presented on a visually intuitive Snowflake.
The value analysis consist of two methodology, (1) Discounted Cash Flow and (2) Relative Valuation. Rather than focusing on one methodology, using these two methodologies allows us to be more fair and diverse in benchmarking for the current share price. Here we do the 6 checkpoints mentioned earlier as follows:
- Is the discounted future cash flow value more than 20% of the current share price?
- Is the discounted future cash flow value more than 40% of the current share price?
- Is the PE ratio less than the market average but still greater than zero?
- Is the PE ratio less than the industry average but still greater than zero?
- Is the PEG ratio within a reasonable range (0 to 1)?
- Is the PB ratio within a reasonable range (0 to 1)?
We examine professional analyst estimates of a company’s future expectations for revenue, cash flow, net income and return on equity, which in turn are used to calculate growth for the respective line items. The 6 checkpoints done here are as follows:
- Is the annual earnings growth rate expected to bear the low risk savings rate, plus a premium to keep pace with inflation?
- Is the annual earnings growth rate expected to bear the average growth rate in earnings of the country of listing?
- Is the annual revenue growth rate expected to beat the average growth rate in revenue of the country of listing?
- Is the annual earnings growth rate expected to be above 20%?
- Is the annual revenue growth rate expected to be above 20%?
- Is the Return on Equity (ROE) in 3 years expected to be over 20%?
We analyze a company's historical performance over the past 5 financial years to understand the stability of its performance and the 6 checkpoints done here are as follows:
- Has the earnings per share (EPS) increased in past 5 years?
- Has the earnings per share (EPS) growth exceeded that of the company’s industry average of the past year?
- Is the current earnings per share (EPS) growth higher than the average annual growth over the past 5 years?
- Is the Return on Equity (ROE) higher than 20%?
- Is the Return on Assets (ROA) above industry average?
- Has the Return on Capital Employed (ROCE) increased from 3 years ago?
Financial Health analysis focuses on understanding the financial position of a company, meaning we scrutinize the Balance Sheet and do 6 checkpoints as follows:
For non-financial institutions:
- Are short term assets greater than short term liabilities?
- Are short term assets greater than long term liabilities?
- Has the debt to equity ratio increased in the past 5 years?
- Is the debt-to-equity ratio over 40%?
- Is the debt covered by short term assets?
- Are earnings greater than 5 times the interest on debt (if the company pays interest at all)?
Note: The last two checks (CHECK #5 and CHECK #6) is replaced with more stringent and relevant criteria if the company is loss-making.
- Does cash and short-term investments cover stable operating expenses (recurring G&A and R&D) for more than 3 years?
- Does cash and short-term investments cover growing operating expenses (recurring G&A and R&D) for more than 3 years?
- Is leverage (Assets to Equity) greater than 20 times?
- Is the coverage of bad loans (Bad Loan Coverage) greater than 100%?
- Is the proportion of lower risk deposits compared to the total funding (Deposits to Liablities) less than 50%?
- Is the proportion of higher risk assets compared to total assets (Loans to Assets) greater than 110%?
- Is the total loans compared to deposit funding (Loans to Deposits) greater than 125%?
- Is the level of bad loans (Net Charge Off Ratio) greater than 3%?
We analyze the dividend payment in terms of its absolute level and against other dividend payers, volatility and sustainability.
- Is the current dividend yield higher than the cash savings rate?
- Is the current dividend yield in the top 25% of dividend paying stocks?
- Has the dividend been volatile in the past 10 years?
- Has the dividend increased in the past 10 years?
- Are dividends paid well covered by net profit (or net income)?
- Are future expected dividends paid well covered by net profit (or net income)?