wsDKII's Fundamental... fundamentals... Help?

[wsDKII]

Hi guys, i have been trying to establish a base point for what makes a good company....or more to the point, what financial ratios should i use to narrow my search for good companies to invest in long term. Long term in this case is either 10+ years (held for DRP, compounding returns), or 1-5 + years (growth investing).

Finding this information has been tricky, but i believe i have the basis to start looking at some companies. I'm wondering if those who have experience in this area can cast their eyes over this and sanity check it?



With so much choice (not only within ASX, but international markets) I think having such tight requirements may assist in reducing the sheer number of opportunities to a more manageable amount....but I fear that I might be excluding a few key opportunities in doing so.

Is anyone able to comment on their 'must have' / 'go to' ratios that they use when filtering what companies to research?

Thanks!

 

[luutzu]

Hi guys, i have been trying to establish a base point for what makes a good company....or more to the point, what financial ratios should i use to narrow my search for good companies to invest in long term. Long term in this case is either 10+ years (held for DRP, compounding returns), or 1-5 + years (growth investing).

Finding this information has been tricky, but i believe i have the basis to start looking at some companies. I'm wondering if those who have experience in this area can cast their eyes over this and sanity check it?

View attachment 61854

With so much choice (not only within ASX, but international markets) I think having such tight requirements may assist in reducing the sheer number of opportunities to a more manageable amount....but I fear that I might be excluding a few key opportunities in doing so.

Is anyone able to comment on their 'must have' / 'go to' ratios that they use when filtering what companies to research?

Thanks!

This is a common question we all have... my short answer is that there is no silver bullet.

The common ratios indicating performance, value, fundamentals... those could be use to get you interested in looking further into the business, narrow the field when you're starting... But if you look deep enough I think you'll find they can be misleading.

Ultimately, you will have to know the company, know its business, know why and where the figures come from. Only from knowing that can you then make proper judgement.

E.g. High dividend is good, or constant dividend payout ratio show stability. But what if the business borrow money to pay for the dividends? That its own operations wouldn't be able to cover it otherwise?

earnings per share... what if it hasn't gone up that much at all over the years but the company split its stocks, didn't raise any new equity, and with the new diluted stocks the original owners (and the company) really have had good earnings growth even though the per share figure is relatively stable.


Find good and dominant businesses... an accounting ratio that generally indicate high risk or weak financial position in most cases might not apply to an exceptionally good company. And you wouldn't know it by just looking at the ratio alone.

e.g. Current ratio... generally best to be able to have enough cash and current assets to pay current liabilities a couple times over. But... what if the company, due to its logistics, its market dominance... is able to convince and persuade its suppliers to take all the risks and only supply it just in time, and when received this company is able to turn inventories over very quickly and demand cash payment the moment sales are made, but then tell its suppliers they won't be paid until a month later.

If such a business is big enough, those liabilities are really an asset, and it's not on the books - not on the asset side anyway.

So some ratio need a quick check to get context, others a bit deeper. Most can't be taken in isolation.

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There might be some misconception about long term investing.
Most might think that being a value investor is a long term investor, where long term means you just hold on to it and it will grow.

In the long run, things don't just grow... they could also decay and rot too.

Buy based on current earning power (or near term earnings estimates)... if the future work out as you kinda expect, or if you and the company got lucky, then hold on, else move. But I think that all investment ought to be made "knowing" you already are making profit the moment you act on it, just that since the market can be wrong and can take some time to realise their mistake or recalibrate their pessimism.. the value investor then must necessarily be a long term, willing to wait, kind of investor.

The market tend to overreact, but they tend not to be wrong for that long. So over a year or two you should see the value of your investment realised. And the beauty of it is that when the market realise it, it's often due to some other, additional, favourable factors...

 

[luutzu]

Hi guys, i have been trying to establish a base point for what makes a good company....or more to the point, what financial ratios should i use to narrow my search for good companies to invest in long term. Long term in this case is either 10+ years (held for DRP, compounding returns), or 1-5 + years (growth investing).

Finding this information has been tricky, but i believe i have the basis to start looking at some companies. I'm wondering if those who have experience in this area can cast their eyes over this and sanity check it?

View attachment 61854

With so much choice (not only within ASX, but international markets) I think having such tight requirements may assist in reducing the sheer number of opportunities to a more manageable amount....but I fear that I might be excluding a few key opportunities in doing so.

Is anyone able to comment on their 'must have' / 'go to' ratios that they use when filtering what companies to research?

Thanks!

Oh ey, there's 3 models from smart people who doesn't agree with me:

The Piotroski F-Score;
Altman Z Score: Financial Distress (industrials)
The Beneish M-Score (Earnings Manipulation).


The Z-score seems to be right based on a couple companies I looked at (there's an entire article and more detailed research by Altman that showed it worked than just my saying so);

The Beneish seems logical but I haven't tried it.

Piotroski don't make sense to me but who knows, it make sense to some people.

wikipedia should have details of it.