Fundamental analysis using Piotroski Score and Graham Number
These two tools may increase accuracy of selection of stocks for you keeping various important factors in these:-
PIOTROSKI SCORE:
Its comprise of "9" fundamentals used to evaluate a company's financial health.
Profitability Criteria:
1. Positive Net Income (Profitability) - (1 point)
A company should have a positive net income in the current year.
2. Positive Operating Cash Flow (Cash Flow) - (1 point)
The company should generate positive operating cash flow.
3. Higher Return on Assets (ROA) - (1 point)
A higher ROA compared to the previous year indicates better asset utilisation.
4. Improvement in Gross Margin - (1 point)
Cash flow from operations being greater than net Income (quality of earnings)
Leverage, Liquidity, and Source of Funds Criteria:
5. Lower Long-Term Debt to Assets (Financial Leverage) - (1 point)
A decrease in the ratio from the previous year signals less reliance on debt financing.
6. Higher Current Ratio (Liquidity) - (1 point)
A higher current ratio compared to the previous year indicates improved liquidity.
7. No New Shares Issued (Dilution) - (1 point)
No new shares issued, preventing dilution of existing shareholders.
Operating Efficiency Criteria:
8. Higher Gross Margin (Operating Efficiency) - (1 point)
An increase in gross margin compared to the previous year shows improved efficiency.
9. Higher Asset Turnover Ratio (Operational Efficiency) - (1 point)
A higher asset turnover ratio compared to the previous year indicates better utilisation of assets to generate sales.
Total 9 points.
For every criteria met by a stock 1 point is awarded otherwise no points are awarded.
The points are then added up to determine the best value stocks.
The sum of these points creates the Piotroski Score.
Piotroski Score range from 0 to 9.
9 being the best and 0 being the worst.
Score of 8 or 9 is considered a good value.
Score of 0 or 1 or 2 is likely not a good value.
A higher score generally indicates better financial strength.
And a lower score generally indicates weak financial strength.
Example:
Piotroski Score for a hypothetical company named "ABC Ltd".
1. ABC Ltd reported a positive net income in the current year - 1 Point.
2. ABC Ltd generated positive operating cash flow - 1 Point.
3. ABC Ltd ROA improved compared to the previous year - 1 Point.
4. ABC Ltd long-term debt to assets ratio increased from the previous year - 0 Point.
5. ABC Ltd improved its current ratio, indicating better liquidity - 1 Point.
6. ABC Ltd didn't issue any new shares - 1 Point.
7. ABC Ltd showed an increase in its gross margin - 1 Point.
8. ABC Ltd asset turnover ratio increased compared to the previous year - 1 Point.
9. ABC Ltd operating efficiency is improved - 1 Point.
The total points accumulated from the Piotroski Score for "ABC Ltd" are 8 out of 9.
Which means "ABC Ltd" is a financially/ fundamentally strong company based on Piotroski Score.
Investors may conduct further analysis before making investment decisions.
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GRAHAM NUMBER:
Its developed by Benjamin Graham - influential investor and author of "The Intelligent Investor."
It's a formula used to identify potential investment opportunities by determining if a stock is undervalued or not.
Formula:
Graham Number = Square Root of (22.5 x Earnings per Share (EPS) x Book Value per Share).
Earnings per Share (EPS) - Its a company's net income divided by the number of outstanding shares. It signifies a company's profitability.
Book Value per Share - Book value is a company's total assets minus its liabilities. Dividing this value by the total number of outstanding shares gives the book value per share.
It provides a quick way to estimate fair price for a stock.
Graham Number represents the fair valuation of a stock.
If current market price is below Graham Number - the stock might be undervalued.
Graham Number is the maximum amount that a defensive investor may pay to buy the stock.
Investors must consider other factors also before making investment decisions.
Example:
Graham Number for a hypothetical company named "ABC Ltd".
with Earnings per Share (EPS) = $ 5.5 and Book Value per Share = $ 40
Graham Number = Square Root of (22.5 x Earnings per Share x Book Value per Share)
Graham Number = √(22.5 x 5.5 x 40)
Graham Number = √(22.5 x $220)
Graham Number = √(4950)
Graham Number = $70.35 approx
Current market price (CMP) of "ABC Ltd" company stock is below $70.35 (Graham Number), its undervalued as per the Graham Formula. Which means a scope of rise in this stock, Investors may conduct further analysis before making investment decisions.
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So compiling above two examples for "ABC Ltd" indicates:
- Piotroski Score for "ABC Ltd" are 8 out of 9 (Indicating strong Fundamentals).
- CMP of "ABC Ltd" company stock is below its Graham Number (its undervalued - May rise)
- This indicates that "ABC Ltd" is a fundamentally strong company available below its fair value price.
- "ABC Ltd" is Good to buy
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This is for educational purpose only. Please consult your financial advisor before investing. we are not SEBI registered.
Hope you liked it
Happy Trading :-)
PIOTROSKI SCORE:
Its comprise of "9" fundamentals used to evaluate a company's financial health.
Profitability Criteria:
1. Positive Net Income (Profitability) - (1 point)
A company should have a positive net income in the current year.
2. Positive Operating Cash Flow (Cash Flow) - (1 point)
The company should generate positive operating cash flow.
3. Higher Return on Assets (ROA) - (1 point)
A higher ROA compared to the previous year indicates better asset utilisation.
4. Improvement in Gross Margin - (1 point)
Cash flow from operations being greater than net Income (quality of earnings)
Leverage, Liquidity, and Source of Funds Criteria:
5. Lower Long-Term Debt to Assets (Financial Leverage) - (1 point)
A decrease in the ratio from the previous year signals less reliance on debt financing.
6. Higher Current Ratio (Liquidity) - (1 point)
A higher current ratio compared to the previous year indicates improved liquidity.
7. No New Shares Issued (Dilution) - (1 point)
No new shares issued, preventing dilution of existing shareholders.
Operating Efficiency Criteria:
8. Higher Gross Margin (Operating Efficiency) - (1 point)
An increase in gross margin compared to the previous year shows improved efficiency.
9. Higher Asset Turnover Ratio (Operational Efficiency) - (1 point)
A higher asset turnover ratio compared to the previous year indicates better utilisation of assets to generate sales.
Total 9 points.
For every criteria met by a stock 1 point is awarded otherwise no points are awarded.
The points are then added up to determine the best value stocks.
The sum of these points creates the Piotroski Score.
Piotroski Score range from 0 to 9.
9 being the best and 0 being the worst.
Score of 8 or 9 is considered a good value.
Score of 0 or 1 or 2 is likely not a good value.
A higher score generally indicates better financial strength.
And a lower score generally indicates weak financial strength.
Example:
Piotroski Score for a hypothetical company named "ABC Ltd".
1. ABC Ltd reported a positive net income in the current year - 1 Point.
2. ABC Ltd generated positive operating cash flow - 1 Point.
3. ABC Ltd ROA improved compared to the previous year - 1 Point.
4. ABC Ltd long-term debt to assets ratio increased from the previous year - 0 Point.
5. ABC Ltd improved its current ratio, indicating better liquidity - 1 Point.
6. ABC Ltd didn't issue any new shares - 1 Point.
7. ABC Ltd showed an increase in its gross margin - 1 Point.
8. ABC Ltd asset turnover ratio increased compared to the previous year - 1 Point.
9. ABC Ltd operating efficiency is improved - 1 Point.
The total points accumulated from the Piotroski Score for "ABC Ltd" are 8 out of 9.
Which means "ABC Ltd" is a financially/ fundamentally strong company based on Piotroski Score.
Investors may conduct further analysis before making investment decisions.
//-------------------------------------------------------------------------------------------------------------------
GRAHAM NUMBER:
Its developed by Benjamin Graham - influential investor and author of "The Intelligent Investor."
It's a formula used to identify potential investment opportunities by determining if a stock is undervalued or not.
Formula:
Graham Number = Square Root of (22.5 x Earnings per Share (EPS) x Book Value per Share).
Earnings per Share (EPS) - Its a company's net income divided by the number of outstanding shares. It signifies a company's profitability.
Book Value per Share - Book value is a company's total assets minus its liabilities. Dividing this value by the total number of outstanding shares gives the book value per share.
It provides a quick way to estimate fair price for a stock.
Graham Number represents the fair valuation of a stock.
If current market price is below Graham Number - the stock might be undervalued.
Graham Number is the maximum amount that a defensive investor may pay to buy the stock.
Investors must consider other factors also before making investment decisions.
Example:
Graham Number for a hypothetical company named "ABC Ltd".
with Earnings per Share (EPS) = $ 5.5 and Book Value per Share = $ 40
Graham Number = Square Root of (22.5 x Earnings per Share x Book Value per Share)
Graham Number = √(22.5 x 5.5 x 40)
Graham Number = √(22.5 x $220)
Graham Number = √(4950)
Graham Number = $70.35 approx
Current market price (CMP) of "ABC Ltd" company stock is below $70.35 (Graham Number), its undervalued as per the Graham Formula. Which means a scope of rise in this stock, Investors may conduct further analysis before making investment decisions.
//---------------------------------------------------------------------------------------------------------------
So compiling above two examples for "ABC Ltd" indicates:
- Piotroski Score for "ABC Ltd" are 8 out of 9 (Indicating strong Fundamentals).
- CMP of "ABC Ltd" company stock is below its Graham Number (its undervalued - May rise)
- This indicates that "ABC Ltd" is a fundamentally strong company available below its fair value price.
- "ABC Ltd" is Good to buy
//---------------------------------------------------------------------------------------------------------------
This is for educational purpose only. Please consult your financial advisor before investing. we are not SEBI registered.
Hope you liked it
Happy Trading :-)