The Fundamental
Rating Score is an aggregate of the star-ratings for different sections of the
Fundamental Analysis for a company. There are 11 filters and each filter is given a rating of
Excellent, Very Good, Good, Marginal or Bad.
Here are the filters:
1. If Return On Equity (ROE) is greater than or
equal to 30% then rate Excellent; If ROE is greater than 20% and less than or
equal to 30% then rate Very Good; If ROE greater than 15% and less than or
equal to 20% then rate Good; If ROE is greater than 12% and less than or equal
to 15% then rate Marginal. Otherwise, rate Bad.
2. The more times Net Income has grown in the past 5
years, the better. Rate Excellent if it has grown 4 times, Very Good if it has
grown 3 times, Good if it has grown 2 times, Marginal if has grown 1 time or
bad if it has not grown at all in the past 5 years.
3. The more times Cash Flow has grown in the past 5
years, the better. Determine the rating in the same manner as for Net Income.
4. If EPS / Long-term AAA Bond Yield is
greater than the stock’s current share price, then rate Excellent; otherwise
rate Bad.
5. If the company’s current Profit Margin is greater
than the company’s average industry Profit Margin, then rate Excellent; if it’s
equal, rate Good. Otherwise rate Bad.
6. If the company’s current Profit Margin is greater
than its 5-year average, then rate Excellent.
7. If the company’s current Long-term Debt / Net Income is
less than 5 then rate Excellent; if it’s between 5 and 16 then rate Good. Otherwise
rate Bad.
8. If the company’s Gross Profit
Margin is greater than or equal to 40% then rate Excellent; if it’s
between 20% and 40% then rate Good; otherwise rate Bad.
9. The more times Net Earnings has grown in the past
5 years, the better. Determine the rating in the same manner as for Net Income.
10. If the company’s Net Earnings
Margin is greater than 20% then rate Excellent; if it’s between 10%
and 20% then rate Good; otherwise rate Bad.
11. If the company has been buying back its
shares in each of the past 5 years (Issuance (Retirement) of Stock, Net)
and it has increased these buybacks in each of the past 5 years, then rate
Excellent. If it has been buying back its shares, but not increasing the amount
in each of the past 5 years, then rate Good. Otherwise rate Bad.
Once you have a rating for each filter,
then assign a score to each rating as follows:
Excellent = 4, Very Good = 3, Good
= 2, Marginal = 1 and Bad = 0.
Then add up the scores and divide by
11. This will give you the average overall rating for the company.
For example, if the stock we are
evaluating rates Excellent for filter (1), Good for (2), Very Good for (3), Bad
for (4), Good for (5), Good for (6), Excellent for (7), Good for (8), Marginal
for (9), Good for (10) and Bad for (11), then our total score would be:
4 + 2 + 3 + 0 +
2 + 2 + 4 + 2 + 1 + 2 + 0 = 22
You would then divide the total score
by 11 (i.e. 22 / 11) to get a rating of 2. Going back to our ratings scale, we see
that a rating of 2 equates to Good. So from a fundamentals perspective,
our stock would be rated as Good. You should generally only consider stocks
that are rated Very Good or Excellent.
