How to determine the financial health of your stocks
Want to know the chances of your portfolio companies going bankrupt? Or if they are dressing up their books? Check out our Essential Checks
By Research Desk | Aug 6, 2018
Know the answers to the following questions?
- What is the likelihood of this company becoming insolvent?
- By fundamental measures, how well has this company done in the recent past?
- Is there any creative accounting going on in the company's books. i.e., should you suspect the company of somehow trying to show better financials than are justified?
Up till now, there was no easy, quick and measurable way to answer these questions. If you are a very experienced investor with a lot of time on your hand, you could do a great deal of original research and come up with some opinions, but that's hardly a feasible method for a practical investor.
Now, the Stock Snapshot page on Value Research Online solves this problem. In our constant endeavour to make it quicker, easier and simpler for readers to take investment decisions, we have added three measures that are simply not available publicly, and for free, to Indian investors about Indian companies. As a matter of fact, this is a global first--nowhere else in the world are these measurements available for free for any set of companies, but that's a separate story.
Here are the three measures that we have introduced in the new 'Essential Checks' panel that we have added to each of 5000+ Stock Snapshot pages on our website, as you can see in the accompanying screenshot.
The Altman Z-score
The Altman Z-score is a widely used measure that applies an algorithm that has been found to have useful predictive value on the likelihood of a business going bankrupt. Keep in mind that this is a likelihood and not a prediction. From a company's financials, it may look likely that bankruptcy looms, but the management may well succeed in improving matters. Read our detailed note about the Altman Z Score.
In the Piotroski F-Score is a composite score of financial health, an easy to use single number that gives an overall financial score to a company. Stocks are rated on a score of 0 to nine based on nine parameters, nine being the best. Since the score is based on recent performance, we can say it represents the current financial strength relative to the recent past. Our detailed note on the Piotroski F-Score.
Modified's C-score is a most interesting measure, and as some investors would say, a most crucial one in India. It gives a likelihood that a company has been dressing its books. When their operational parameters worsen, and the stress starts showing in the financial numbers, a lot of businesses try to be a little creative with their accounts so that investors don't take to their heels.What we have here is a probabilistic score that measures a company's resemblance to other companies where the accounting has been creative. The higher the C-score, the higher is the probability that something is suspect. Our detailed note on the Modified C-score.
Apart from these three ground-breaking measures, the Essential Checks section also contains four conventional measures that tell you whether the stock is fairly priced. These are, current P/E compared to the five-year range, current P/B compared to the five-year range, Earnings Yield, and Price to earnings growth ratio (PEG).
Together, these checks will ensure that your research efforts in any stock get off to a flying start.