Chapter 4: Process or How the heck do I Invest in Equity Successfully?

4.4 X-Ray a shortlisted stock to confirm its Quality with speed and accuracy


What are the necessary and largely sufficient data points to look at to build conviction about a shortlisted opportunity? What structured report will make it easy to analyze and get useful insights of any stock and get better at it? What is required to feel confident about the future performance of the company? How do you do this without having to be an expert at financial data analysis?
 
The Quality FastTag on a stock provide by Moneyworks4me or some other screening method that you use will give you a shortlist of stocks that are investment worthy. But you need a way to confirm this for yourself so that you invest in it confidently but in a way that you can do it with speed and accuracy.  As a retail investor you don’t have the time, expertise and passion like Warren to sit around every day and study annual reports so thoroughly that you know more about the company that its overpaid CEO. Luckily, you don’t have to invest the amount of money that Warren does in any one stock. So, you need a very good fit-for-purpose but accurate reading on the stock that enables you to make an informed decision. You should be okay to miss out a few potential turnaround stocks, future winners but you want to avoid investing in a weak company. Remember, you will make your desired healthy returns on your portfolio even if you miss a few winners but buying more a couple of loser stocks will adversely impact your returns. 
 
Four Financial Parameters over 10 years in addition to the DeciZen Rating tells you one heck of lot about the company’s quality. They are:
  1. Earnings per Share (EPS)
  2. Net Sales
  3. Book Value per Share (BVPS)
  4. Debt-to-Operating Cash Flow.
Let’s see how!
 

What is Earning per Share, and why is it important? 

What is the first thing that you will look for in a company before investing? Obviously, whether it is making a profit  and consistently! Profit After Tax (PAT) is what shareholders get when all is said and done (though you actually get it in hand only when the company pays out dividends). Earnings per Share (EPS) is Profits-After-Tax per Share which tells us what profits you earned on every share that you own of the company. Why is this important?
 
When you put money in a Fixed Deposit, you may get an interest @7%; i.e. you get Rs. 7 a year for a Rs. 100 investment, in addition to a promise from the bank of getting back your Rs. 100 at the end of the term of the FD. EPS/Price is the equivalent of the interest rate earned by the company, its owners. It tells you that a company earning an EPS of Rs. 7, if available at a price of Rs. 100, has the same Yield rate as the interest on FD. EPS/Price is called Earning Yield, and the more popular ratio Price/EPS or P/E ratio or just PE is the inverse of this. 
 
But why would you pay more than Rs.100? The main fundamental reason could be that you expect the company to earn more than Rs. 7 the next year, and so on.  For this, you need to see how well the company has grown its EPS year after year. When you see this color-coded green on the company 10-Year X-Ray, it means it has clocked a healthy 12%+ growth in that year, if less than 8% it is coloured red and between 8 and 12% its OPrange. Seen over 10 years, you can easily conclude on its profit track record. 
 
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