Investment evaluation financial ratios

The best ratios to see if a company is good value and will go up in value.

1, Return on assets = assets on balance sheet divided by profits. A high profitability compared to balance sheet, shows are good at getting return on capital.

It can often be seen that the stock market has done this assessment poorly when valuing share prices.

This is from Neil Woodford, who is a value investment fund manager.

2, Cash flow statement: As profit and loss and balance sheets come from accruals accounting, where things are accrued, rather than cash, companies can create all kinds of things using accruals that do not exist.

Examples are invoices which unlikely to be paid, things which on historical value seem valuable but on the market are worth nothing etc.

Cash flow shows if the company is really making money.

3, price earnings ratio (p/e) : company share price divided by it’s profits

4, price earnings growth (PEG): it is from Jim Slater’s book ‘The Zulu Principle’.

Price divided by earnings, eg. £1 share price, divided by £0.05 per year =20.

Then divide by expected growth rate of company, eg. 20 /10% =2.

So a lower end number is better.

The prediction of growth needs to come from it having shown growth, out of at least 4 of the last 5 years.

5, Altman Z score

5, How successful have the managers previously been. Either look at performance where the head managers have been before, or easiest companies where the head staff been there for 5 years or more, so can see their results from that company’s performance.

Best to invest in businesses where head managers tend to stay around, as show they want to grow by getting results and not jumping around to try and get better jobs.

6, Macro economic cycles: Normally about 7 years between boom and bust.

A cycle that was first recorded in the bible over 5700 years ago in the bible and has stood the test of time since. It was mentioned as a dream of Pharaoh, analysed by Moses.

Also using Google Finance to show long term total stock market valuation indecises will help show this.

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