{"id":22835,"date":"2018-05-10T00:00:00","date_gmt":"2018-05-09T18:30:00","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/how-to-choose-good-stocks-with-strong-financial-track-record\/"},"modified":"2018-05-10T00:00:00","modified_gmt":"2018-05-09T18:30:00","slug":"how-to-choose-good-stocks-with-strong-financial-track-record","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/how-to-choose-good-stocks-with-strong-financial-track-record\/","title":{"rendered":"How to Choose Good Stocks: Check for an Excellent Financial Track Record"},"content":{"rendered":"

Why a Company\u2019s Financial Track Record Matters<\/strong><\/span><\/h2>\n

Investing in stocks is not about chasing tickers \u2014 it\u2019s about\u00a0buying a wonderful business<\/strong>.<\/span>
A wonderful business usually has\u00a0three defining traits<\/strong>:<\/span><\/p>\n

    \n
  1. A\u00a0sustainable moat<\/strong> that protects its profits<\/span><\/li>\n
  2. An\u00a0excellent financial track record<\/strong><\/span><\/li>\n
  3. Trustworthy management<\/strong><\/span><\/li>\n<\/ol>\n

    Among these, an\u00a0excellent financial track record<\/i> is a\u00a0Go\/No-Go filter<\/strong> \u2014 companies that fail this test should be ignored altogether.<\/span><\/p>\n

    This one step alone can protect you from poor investments and dramatically improve your odds of success.<\/span><\/p>\n

    A company that has delivered\u00a0consistent performance over 10+ years<\/strong> often also demonstrates the other two traits \u2014 a moat and credible leadership \u2014 making it worth deeper analysis.<\/span><\/p>\n

    Six Financial Parameters That Define a Great Company<\/strong><\/span><\/h2>\n

    While annual reports can feel overwhelming, you can evaluate a company quickly using\u00a0six key financial parameters<\/strong>.<\/span><\/p>\n

    When examined together over a 10-year period, they reveal the company\u2019s complete story.<\/span><\/p>\n

    \n
    \n\n\n\n\n<\/colgroup>\n\n\n\n\n\n\n\n\n
    \n

    Key Metric<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    What It Measures<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Why It Matters<\/strong><\/span><\/p>\n<\/td>\n<\/tr>\n

    \n

    Earnings per Share (EPS)<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Profits per share<\/span><\/p>\n<\/td>\n

    		\n

    Shows profitability and earnings growth potential<\/span><\/p>\n<\/td>\n<\/tr>\n

    \n

    Net Operating Cash Flow (OCF)<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Actual cash generated from operations<\/span><\/p>\n<\/td>\n

    		\n

    Verifies if profits are real, not accounting illusions<\/span><\/p>\n<\/td>\n<\/tr>\n

    \n

    Net Sales<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Revenue growth over time<\/span><\/p>\n<\/td>\n

    		\n

    Confirms market demand and\u00a0pricing power<\/span><\/p>\n<\/td>\n<\/tr>\n

    \n

    Book Value per Share (BVPS)<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Value of assets per share<\/span><\/p>\n<\/td>\n

    		\n

    Indicates reinvestment and long-term capital build-up<\/span><\/p>\n<\/td>\n<\/tr>\n

    \n

    Return on Capital Employed (ROCE)<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Profit earned on capital invested<\/span><\/p>\n<\/td>\n

    		\n

    Reflects efficiency and quality of management decisions<\/span><\/p>\n<\/td>\n<\/tr>\n

    \n

    Debt-to-Operating Cash Flow<\/strong><\/span><\/p>\n<\/td>\n

    		\n

    Ability to repay debt from operations<\/span><\/p>\n<\/td>\n

    		\n

    Signals financial resilience and balance-sheet strength<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n<\/div>\n

    Let\u2019s explore why each of these parameters matters.<\/span><\/p>\n

    1. Earnings per Share (EPS): The Profit Engine<\/strong><\/span><\/h3>\n

    The first thing any investor should check is whether a company consistently\u00a0makes profits after tax<\/strong>.<\/span><\/p>\n

    Earnings per Share (EPS)<\/strong> =\u00a0Profit After Tax \u00f7 Total Shares Outstanding.<\/i><\/span><\/p>\n

    To put it simply:<\/span><\/p>\n

      \n
    • If a company earns an EPS of Rs. 7 and trades at Rs. 100, its\u00a0Earnings Yield<\/strong> is 7%, similar to earning 7% interest on an FD.<\/span><\/li>\n
    • The\u00a0Price-to-Earnings (P\/E)<\/strong> ratio is the inverse of that yield.<\/span><\/li>\n<\/ul>\n

      Investors pay more than Rs. 100 for such a stock only if they expect\u00a0future earnings to rise<\/strong> \u2014 meaning the business has strong growth prospects.<\/span><\/p>\n

      But remember:\u00a0reported profits can sometimes mislead<\/strong>.<\/span><\/p>\n

      That\u2019s why the next parameter \u2014 Operating Cash Flow \u2014 is crucial.<\/span><\/p>\n

      2. Net Operating Cash Flow: The Reality Check<\/strong><\/span><\/h3>\n

      Profits are accounting numbers; cash is real.<\/span><\/p>\n

      A company must be able to convert its reported profits into\u00a0actual cash inflows<\/strong>.<\/span><\/p>\n

      If a firm consistently reports profits but its\u00a0Operating Cash Flow (OCF)<\/strong> is weak, it may mean profits are tied up in working capital or receivables \u2014 a red flag.<\/span><\/p>\n

      Rule of thumb:<\/strong><\/span><\/p>\n

      A consistently lower OCF compared to net profit =\u00a0avoid the company.<\/i><\/span><\/p>\n

      3. Net Sales: Growth That Builds Confidence<\/strong><\/span><\/h3>\n

      Profits can\u2019t grow without\u00a0sales growth<\/strong>.<\/span><\/p>\n

      Examine whether a company\u2019s\u00a0Net Sales<\/strong> have grown steadily year after year.<\/span><\/p>\n

      Example:<\/span>
      If the paint industry grows at 6% annually and inflation is 4%, a paint manufacturer must grow\u00a0at least 10%<\/strong> in sales just to maintain its market position and profitability.<\/span><\/p>\n

      Sustained growth in sales and margins signals that the company has pricing power<\/strong> and demand durability<\/strong> \u2014 signs of a moat.<\/span><\/p>\n

      4. Book Value per Share (BVPS): Reinvestment for the Future<\/strong><\/span><\/h3>\n

      BVPS<\/strong> shows how much the company is investing back into its own growth.<\/span><\/p>\n

      Strong companies use retained earnings to\u00a0expand capacity, upgrade technology, or build new products<\/strong>.<\/span><\/p>\n

      If management doesn\u2019t see growth opportunities, they may\u00a0return profits to shareholders<\/strong> via:<\/span><\/p>\n

        \n
      • Dividends<\/strong>, or<\/span><\/li>\n
      • Buybacks<\/strong> (as Infosys and TCS did in 2017)<\/span><\/li>\n<\/ul>\n

        Both reward shareholders and signal strong capital discipline.<\/span><\/p>\n

        5. Return on Capital Employed (ROCE): Efficiency of Capital<\/strong><\/span><\/h3>\n

        A company is a\u00a0money-using, money-making machine<\/strong>.<\/span><\/p>\n

        ROCE tells you how efficiently it converts capital (both equity and debt) into profits.<\/span><\/p>\n

        ROCE = EBIT \u00f7 (Equity +\u00a0Debt)<\/strong><\/span><\/p>\n

        A ROCE of 15% means the company earns Rs. 15 for every Rs. 100 of capital employed.<\/span><\/p>\n

        However, ROCE must exceed the\u00a0Weighted Average Cost of Capital (WACC)<\/strong> \u2014 the blended cost of debt and equity.<\/span><\/p>\n

          \n
        • If ROCE > WACC \u2192 the company creates wealth<\/span><\/li>\n
        • If ROCE < WACC \u2192 it destroys wealth<\/span><\/li>\n<\/ul>\n

          For instance, 15% ROCE is great if WACC is 12%, but poor if WACC is 16%.<\/span><\/p>\n

          6. Debt-to-Operating Cash Flow: Financial Safety First<\/strong><\/span><\/h3>\n

          Debt can accelerate growth \u2014 but only if it\u2019s manageable.<\/span><\/p>\n

          This ratio tells you\u00a0how many years it would take for a company to repay all its debt using operational cash flow<\/strong>.<\/span><\/p>\n

          Rule of thumb:<\/strong> Debt\/OCF \u2264 3 is considered healthy.<\/span><\/p>\n

          A higher ratio implies financial strain and increases the risk of default \u2014 something that can crash stock prices during downturns.<\/span><\/p>\n

          What Defines an Excellent Financial Track Record?<\/strong><\/span><\/h2>\n

          A company that consistently meets these benchmarks for\u00a010 years or more<\/strong> is likely to be fundamentally strong and well-managed:<\/span><\/p>\n

          \n
          \n\n\n\n<\/colgroup>\n\n\n\n\n\n\n
          \n

          Parameter<\/strong><\/span><\/p>\n<\/td>\n

          		\n

          Benchmark for Excellence<\/strong><\/span><\/p>\n<\/td>\n<\/tr>\n

          \n

          EPS, Net Sales, BVPS Growth<\/span><\/p>\n<\/td>\n

          		\n

          \u2265 12% CAGR<\/span><\/p>\n<\/td>\n<\/tr>\n

          \n

          ROCE<\/span><\/p>\n<\/td>\n

          		\n

          > 13% every year<\/span><\/p>\n<\/td>\n<\/tr>\n

          \n

          Wealth Creation Index (ROCE \u2013 WACC)<\/span><\/p>\n<\/td>\n

          		\n

          Positive<\/span><\/p>\n<\/td>\n<\/tr>\n

          \n

          Debt-to-Operating Cash Flow<\/span><\/p>\n<\/td>\n

          		\n

          \u2264 3 years<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n<\/div>\n

          Companies that clear these filters deserve a spot on your\u00a0Stock Watchlist<\/strong> \u2014 they\u2019re potential long-term compounders.<\/span><\/p>\n

          Where to Find These Metrics Easily<\/strong><\/span><\/h2>\n

          You don\u2019t need to sift through 100-page annual reports.<\/span><\/p>\n

          Platforms like\u00a0MoneyWorks4me<\/strong> simplify financial analysis by presenting all six key parameters in one place, in easy-to-read charts covering the last decade.<\/span><\/p>\n

          That\u2019s how you can\u00a0separate investment-worthy businesses from the rest<\/strong> \u2014 quickly, logically, and confidently.<\/span><\/p>\n

          The Bottom Line<\/strong><\/span><\/h2>\n

          Selecting good stocks starts with identifying companies that have an\u00a0excellent financial track record<\/strong>.<\/span><\/p>\n

          It\u2019s the first filter that helps you avoid poor businesses and focus on long-term wealth creators.<\/span><\/p>\n

          Great businesses show great numbers \u2014 consistently.<\/strong><\/span><\/p>\n

          Learn to recognize them, and your portfolio will thank you.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

          Learn how to choose good stocks by evaluating six key financial parameters \u2014 EPS, OCF, Net Sales, BVPS, ROCE, and Debt-to-OCF. Discover how a strong financial track record reveals a company\u2019s quality and long-term potential.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_is2025_no_summary":false,"footnotes":""},"categories":[1144,1151],"tags":[],"class_list":["post-22835","post","type-post","status-publish","format-standard","hentry","category-sensible-investing","category-stock-investment"],"_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22835","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=22835"}],"version-history":[{"count":2,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22835\/revisions"}],"predecessor-version":[{"id":23209,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22835\/revisions\/23209"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=22835"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=22835"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=22835"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}