Forum Archive Index - October 2000

["Brian Brakenridge" <brianbrak@xtra.co.nz>]

 

Phil;

 

Outstanding work! You're going to make a well rounded Pathologist.

 

This is an excellent starting point and for those who are just catching up on this thread I think it also needs to be stressed that the fundamentals we are looking at are not just Buffett but Graham, Fisher, Lynch, Motley Fools, Focusinvestor.com etc.

 

My initial comment is that we could refine the criteria somewhat by splitting it into the much discussed "quantitative" and "qualitative" groups and refine it further by scoring the former with marks out of 5 and the latter 3.

 

My reasoning: many of the quantitative criteria infact give us good indications as to the type of company and it's management's efficacy. e.g.. a company with a low net margin might indicate a commodity or a company which has significant costs associated with it's business. Consistently high ROE indicates possibly management's ability to reinvest income efficiently and find new business opportunities.

 

So here's my vote;

 

Category I (quantitative): 5 points

 

Net Margin >10%

Growth of Net Margin >10%

ROE >15%

Growth in ROE>15%

Growth in Shareholder's funds or Equity >15%

EPS growth >15%

Total Debt/Equity <30%

 

Another I'd like to add here is an "activity ratio". This is looking at issues like management's ability to handle inventory and cash flow in and out of the company. One good calculation is Current Assets - Cash / Current Liabilities and we're looking for a figure preferably <1.25. Only effective when compared with previous years so you can look at trends and also obviously difficult with investment companies etc. Maybe a simpler ratio would be Credit Sales / Accounts receivables.

 

Category II (qualitative): 3 Points

 

Consumer monopoly or at least strong dominance

Management's ability and single-minded desire to grow it's owners investment (managers who think like owners)

Is it a commodity company

Is ownership dominated by family interest

 

Problem here is that it's going to take a lot more work to carry out there calculations and I'm wondering if at some point soon we don't get the big knife out and start slashing some of the companies who wouldn't have little hope of fitting the criteria. Maybe try and get down to a group of <15.

 

I have a gut feeling I'm missing something vital but this is a start.