>A Small Discussion on Scanning Companies

To address the question of how efficient a firm is in using its capital.

We have to define a few things.
1. What do we call as Return?
2. What do we call as Capital?
3. What is the re-investment required for sustain.

Some concerns
1. The earnings per share of a firm reflect not just the earnings from operations of a firm but all other income as well. Thus, a firm with substantial holdings of cash and marketable securities may generate enough income on these investments to push up earnings.
2. In addition, earnings per share and equity multiples are affected by how much debt a firm has and what its interest expenses are.

Owner Earnings = Net income + Depreciation & Amortization – Capital Expenditures

Enterprise Value = Market Value of Equity + Market Value of Debt - Cash & Marketable Securities

I like this ratio Owner Earnings / Enterprise Value

Why not include Interest paid in numerator while we including Debt in the deniminator.
1. Penalise companies which have a lot of Debt.
2. This is also in recognition of the "Safe Scalability" of the company. If a company needs a lot of debt to sustain, imagine how much more fuel it would need to grow.
3. This is a safe measure..!!

I use Enterprise Value to gauge the 'total' capital in the hands of management. Just looking at equity or assets is not my preference. Since when you try to scan for stocks, very frequently during "good times" companies with high Debt will shows excellent ROE while in truth they could be destroying value.

Combine this scan with Low PE and you have a very good cluster of companies to start of your deeper analysis.
Again the E in PE is the modified Owner Earning as shown above.

Other things which I look at apart from the above two are:
1. High Operating Profit Margin. (direct show of competitive strength, try to gauge if it can remain this way)
2. Return on Total Assets.
3. Moderate to High Sales growth.
4. Growth without taking on tons of Debt.
5. Non-Cyclical. (get into Cyclicals if you think the Commodity business is at the lows of the cycle & the company is more competitive then the rest in the pack)
6. Triggers which would lead to dramatic changes.
7. Insider Accumulation.
8. Low PE.

To read more on this follow this link.
>ROIC + Earnings Yield? Magic Formula for Value Investing?

Need to know places where you can Scan Indian companies Follow this link
>Fundamental Information & Scanners of Indian Stocks

Have a view? Or you think this is un-optimal do share your views. Share links which you find helps in scanning and understanding more. Cheers..!!