I going through the material again and still pretty new to stock investing, one problem I seem to encounter deciding what are the benchmark figures for the indicators (P/E and the like) when stock screening.
I saw it covered briefly in the webinar but would like to have it properly listed down what benchmarks fifth person is using during screenings or what are the benchmark used by everyone?
Not sure if this was already listed, could not find anything from a simple search >.<
I have started learning Value-Growth Investing from The Fifth Person through Investment Quadrant since last October and I also attended the webinar held yesterday. Here’s what I jotted down from Victor’s explanation:
Screening Financial Numbers
– increasing revenue
– increasing profit excluding one-off items
– cash compared to debt: Cash > Debt
Debt / Equity: < 1
Debt / Cash Flow: < 5
– generating cash flow
– free cash flow
– profit margin
– cash conversion cycle: < 180 days
– gross profit to asset: > 20%
– ROE: >10%
– FCF/Equity: >10%
– Quality of earnings: > 0.8
For myself personally, when I do screening, I usually look for companies with:
- Debt / Equity < 0.5 (This is to make sure companies don’t take on too much debt which can lead to bankruptcy during financial crisises like what is happening now to some companies who took on too much debt. For company with debt / equity that is more than 0.5 but less than 1, I’ll look at their interest coverage ratio. Normally, I’ll avoid looking at companies with ratio more than 1, unless I can justify the reasons why they are taking so much debt eg. for business expansion and they have very high interest coverage ratio. Since I am just starting out, I’ll just stick to the ratio < 0.5.)
- ROE > 15% (This measures how profitable a company is)
- Increasing revenue and net profit for the past five years (You’ll want to invest in companies that generate money consistently)
- Quality of Earnings > 1 (to check if the companies have issues collecting money from customers)
As for valuation metrics, I don’t really use them while screening stocks. That is because metrics like P/E differ from industry to industry and it can be sky high especially now that the market is very overvalued though IQ taught us that P/E < 10 is ideal so there is no best P/E ratio that can fit all companies. Also, you may miss out some good companies due to high valuation.
Once you have the companies which fit the criterias that you have set for, remember to study its business model and management then only you go to valuation. The mistake that I did was I stopped doing research after finding out that certain good companies are overvalued at the moment but after Victor’s sharing yesterday, we should continue to do research, gather our convictions and take action when the market goes for a dip.
This is what I have learnt and applied thus far. Do correct me if I am wrong as I am still learning, just sharing (: happy investing!
April had list out our criteria for screening company. You can take a look at it.
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