Is this good criteria for value investing?
First, let me just say that I'm 15. So before you go on making fun of me remember that Im only 15.
Ok, here are the criteria...
Low P/E Ratio (bottom 10% of sector)
PEG of less than one
Debt to Equity Ratio of less than one (To see that they're not in debt)
Price to Book Ratio of less than one
Around 6% - 12% average growth over past 5-6 years
Share price is 66% or less of intrinsic value (I calculate this with CURRENT assets minus TOTAL liabilities)
The ability to pay off total debt within one year (net income minus total liabilities)
Return On Equity of at least 17% for past five years
Return On Capital of at least 17% for past five years (Should be about the same as Return On Equity)
Pre-Tax profit margin being 20% more than industry average (average for past five years and I used pre-tax because of many companies are in different tax brackets which messes up the whole algorithm...)
Pre-Tax profit margin must also be at least 20% on top of the 1.2X above industry average criteria
Income per employee more that 10% than industry average (I think that this is a good indicator of good management)
A moderately (or widely) prevalent product/Brand name
Market cap over $1 billion (I don't know why, I just feel safer with relatively larger market caps)
Are these good criterion? I think they are, but I can't find any companies with such specifications... I guess I'll have to wait until comes along. Also, can someone explain "Free Cash Flow". I've heard this in a lot of places but I'm still confused about it... Thank you
- 1 decade agoFavorite Answer
wow, those are great criteria - if you find this company, please let me know because I want a piece of it myself.
Good start - you have a plan, but remember that the business cycle and sector rotation are also very important. Also, you need to keep your eye on the markets and get a "feel" for what type of stocks are in favor. Lastly, a lot of investing is controlling emotion, not just numbers.
Free Cash flow is bascially the cash left over after a company has paid all its expenses and its capital expenditures (investments back into the business). Negative FCF is common in beginning, high growth companies as they are ploughing back capital into the business and is not necessarily a bad thing.
Cash Flow is the amount of cash a company generates from investments, operations, and financing. Cash outflows result from expenses and investments. It can be found in a company's financial statements and is reported over a given period. Remember that when calculating cash flow, non-cash expenses such as amortization are added back in to get the figure as these expenses do not actually result in true cash outlays. Unlike negative FCF, negative cash flow is usually not a good thing.
You have a very good start here, but it will be tough to find a company with such stringent criteria. I agree with the strategy of buying large cap companies and also buying the best in an industry or sector which seems to be your goal.
Great work - just keep on learning as much as you can.
- 4 years ago
Too many steps. 1. Know the company, in and out. -what have they done? -what has the operators done? 2. Risk What are you willing to risk? 3. Failure What are you willing to lose? 4. Turnaround What are signs you'll invest more, or pull out?
- dkLv 61 decade ago