Value Investing Check list
Profitability
and Accrual
1) Consistent positive ROE (>10
percent, if long term Government bond is 2.5%, Equity Risk Premium 5.5%)
2) Consistent positive ROIC (smaller
than ROE but the gap is not wide due to non-leverage nature)
3) Cash Flow from Operation > Net
Income
Relative
Valuation(Margin of Safety)
1) Having P/B ratio < 2(adjustable
according to ROE, high ROE justified for more P/B)
2) Current P/E less than ROE
3) Earning Yield >10%
4) P/E less than 40% of the highest P/E
the stock had over the past 5 years(Graham)
5) P/FCF less than 15, usually 11-12,
if under 10 is the best
6) FCF is atleast 5% of Sales
Leverage,
Liquidity and Source of fund
1) Lower debt to asset ratio
2) Improving current ratio history
3) No new shares issued
Operating
Efficiency
1) Improving Gross Margin for the last
5 years
2) Higher Asset Turnover Ratio for the
last 5 years
Bankruptcy
and Manipulation
1) Check Bankruptcy Risk by Altman
Z-score
2) Check Earning manipulation flag by
Baneish M-score
Value creation
sub-check list
1) Improving Cash Flow to the firm by:
a. Eliminate asset that earn less than
cost of capital
b. Improve operating efficiency
c. Reduce tax burden
d. Reduce capital expenditure but
balanced against growth
e. Reduce non-cash working capital
2) Increase expected growth rate of the
earning by:
a. Increase reinvestment rate provided
marginal return > cost of capital
3) Increase length of high growth
period by having economic moat:
a. High barrier of entry
b. Strong brand name
c. Patents
d. Having high switching cost
e. Cost advantage of economy of scale
4) Reduce cost of capital:
a. Reduce operating risk
b. Reduce operating leverage by
reducing fixed cost
c. Change financial mix by altering mix
of debt and equity used to finance the firm
d. Matching cash flow on debt and cash
flow of asset using derivatives and swap
Know When
to Buy/Sell
1) Buy when volatility index go above
30
2) Sell when volatility index go below
15(case by case scenario)
