Investments  

Value metrics: Highlighting ‘value’

This article is part of
Understanding ‘Value Investing’ - August 2013

According to Risingsum.com, a newly launched platform dedicated to unearthing value stocks using a proprietary screening methodology, there are certain ratios and fundamentals that can be used to highlight potential opportunities.

Ratios:

Return on equity

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Defined as the net earnings divided by the shareholders’ equity. Sustained Return on Equity implies sustained growth, but it’s important to check that this is the case. Shareholders’ equity can be calculated by subtracting the current liabilities from the current assets. Retained earnings, in most cases, make up the largest portion. A company improving its Return on Equity will have a positive AlphaSlope.

Return on assets

Defined as the net earnings divided by total assets. It illustrates how much income is generated for each unit of investment. A company improving its return on assets will have a positive AlphaSlope.

Book value to share

The book value to share ratio gives an indication of how much would be returned to common shareholders if the company were to liquidate. A company improving its book value to share ratio will have a positive AlphaSlope.

Current ratio

The current ratio gives an indication of how capable a company is of paying back its obligations. The higher the current ratio, the more capable a company is of paying back its short-term liabilities. A company improving the ratio between its assets and liabilities will have a positive AlphaSlope.

Debt to equity

The debt to equity ratio indicates the proportion of debt a company has used to finance its growth. A company improving its debt to equity ratio will have a negative AlphaSlope.

Net profit margin

Net profit margin (aka return on sales) tells you how much profit a company generates for each unit of sales. Companies that increase their costs quicker than their revenue will see their net profit margin decrease, hence we look companies with a positive AlphaSlope.

Fundamental data:

Current assets

On the balance sheet, current assets represent the value of all assets that are expected to be converted into cash within one year. Typical current assets include cash, cash equivalents, short-term investments, accounts receivable and inventory. Also known as ‘current accounts’.

Current liabilities

On the balance sheet, current liabilities represent all obligations that are due within one year. Typically, current liabilities include short-term debt, accounts payable, accrued liabilities and other debts.

Long-term debt

On the balance sheet, long-term debt represents all obligations that are due after one year. Typically, long-term debt includes mortgages and debentures.

Revenue

Often the first line of the income statement, this represents the amount of money generated by the company. Also known as ‘sales’.

Total net income

On the income statement, total net income represents the total profit generated by the company. It is calculated by subtracting the total expenses (operating expenses, depreciation, interest and taxes) from the revenue generated in the same period.

Source: Risingsum.com