Eight point checklist for history scan

In the last article I gave broad guidelines about where to find the data. Collecting the historical figures of a number of companies is a definitely a time consuming task. The internet is full of information that leaves most of us confused! Now; let me give out a specific list of data to be collected. A powerful Eight point check list through which we can identify companies with an Excellent Financial Track record.

The Eight point check list.

  • 1. Revenues- A company can grow only by increasing it’s sales. Hence, revenues over that last 10 years is the first number to be collected. A promising company should have a minimum growth of 15% every year.
  • 2. EPS-Earnings per share- Profit, of course, is next in the check list.  The profits and Earnings per share should be in proportion to revenues.
  • 3. Book value – Book value is simply the value of the company right now, as per the balance sheet. That is, the company’s assets minus its liabilities. This figure shows how much would be left for ordinary shareholders after all the outstanding obligations of the company are paid off and the company is closed. Divide this figure by the number of shares and you get the book value per share. This book value per share should show a minimum consistent growth of 15% year on year.
  • 4. ROIC- Return on capital invested – ROIC measures a company’s profitability by revealing how much profit a company generates with the total money it has invested. Total money invested in business includes long-term debt, and common and preferred shares. Invested capital can be in buildings, projects, machinery, shares in other companies’ etc. Check whether the company is recording a consistent growth in its ROIC.
  • 5. ROE – Return on Equity. Return on equity measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. A consistent growth in ROI is a must.
  • 6. Debt /Equity ratio- Indicates what proportion of equity and debt that the company is using to finance its assets.  An ideal debt equity ratio would be less than 1. A debt/equity of .60 or less is excellent. A higher ratio would demonstrate a heavy reliance on loans.
  • 7. Debt to net profit ratio- As said earlier, borrowed money forms the ‘debt’ of the business. It’s common for business to borrow money from banks. This ratio answers one important question: Does the business generate enough earnings to repay its financial commitments? If yes, the probable time frame within which it would be able to pay back its commitments.
  • 8. Historical share price- You should also have an idea about how the stock price has moved in the past. How it has reacted when major events unfolded – like the 9/11 attacks and how it bounced back. While analysing historical share prices, you may have to watch for stock splits and bonus issues, which reduces the stock price. It is an automatic adjustment.

CONCLUSION

Only fundamentally strong and well managed companies will pass this 8 point check comfortably. This will give a clear idea about the company’s financial history. That’s not all. You also need to collect some qualitative factors about the company. More about those non-financial datas in our next lesson – Gathering Qualitative information.

You may like these posts:

  1. History Scan – An introduction.
  2. Understanding interest coverage ratio
  3. Understanding Dividend yield & Earnings yield.

1 Response to “Eight point checklist for history scan”

Beginner

June 14, 2012 at 2:42 am

Thanx a lot Mr. Victor!
These are what i was supposed to find since your first lession..
What a clear explanation you’ve! Splendid!
Now there’s no question at all…
Once again let me tell you thank you very much 4 thinking & writing these for like us – ‘BEGINNERS’ :-)

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