Saturday, May 6, 2017
TOOL FOR PICKING STOCK WINNERS: Billionaire investors such Warren Buffett and many others have made money by buying assets on the cheap, waiting for sentiment, market conditions and business optimism to change for the better and taking profits as the price and values rose. Investors swing between fear and greed and the time to buy, generally speaking, is when nobody else is buying. But wait a minute you might say. What about stocks whose fundamentals are shot to pieces with their share prices sinking down out of sight? Surely these are not worth buying at any price! You would be correct to say that. However there is a very simple test based on ratio analysis (pioneered by Benjamin Graham) that will tell you exactly how strong or weak an individual company’s finances are. It is critical that you USE THIS TOOL to value stocks. A value below 1.8 sends a dire warning, between 1.9 and 3.0 is moderately OK, anything above 3 is good. Above 5 is great news. Financial Ratios: Rate of Return on Assets (ROA), Rate of Return on Common Equity (ROE), Return on Capital (ROIC), Common Earnings Leverage, Cash Flow from Operations/Total Cash Flow Ratio, Cash Flow from Investments/Total Cash Flow Ratio, Cash Flow from Financing/Total Cash Flow Ratio, Operating Cash Flow/Current Liabilities Ratio, Operating Cash Flow/Total Liabilities, Operating Cash Flow/Capital Expenditures, Working Capital/Current Liabilities Ratio, Working Capital/Long Term Liabilities Ratio, Working Capital/Total Debt Ratio, Working Capital/Current Assets Ratio, Working Capital/Total Assets Ratio, Income Tax Expense/Revenues Ratio, Total Assets Turnover Ratio, Fixed Assets Turnover, Current Ratio, Acid Test (See note for Quick Ratio), Accounts Payables Turnover, Days Accounts Payables outstanding, Accounts Receivable Turnover Ratio, Days Receivables Outstanding Ratio, Inventory Turnover, Days Inventory Outstanding, Total Debt to Equity Ratio, Total Debt Coverage ratio, Long Term Debt Ratio, Long Term Debt to Total Assets, Long Term Debt to Shareholder Equity, Total Liabilities/Total Assets, Interest Coverage Ratio, Altman's Z (Solvency) Ratio.