My Stock Analysis Principle

Just to outline the key principle when i try to analysis the company.

1. Type of company determine evaluation method

As explain below:

" Evaluate the company by treating it as stable business. In this way, the performance of the company: the Return On Invested Capital (ROIC) will be pretty predictable through reading past financial statement. Any change of ROIC will not be sudden and can be detected through trend analysis. 

Evaluate the company by treating it as a fast growing business. In this case, very large CAPEX is expected during the first few years of growing phase, where higher depreciation will results later. This type of company cannot be evaluate through studying the past financial statement. They can only be evaluated, by understanding the industry environment the company operated at for the next five to ten years, then predict if they can recoup from their initial Capital Investment. "

2. Return on Invested Capital (ROIC) in future is what matter to me. 

(See here for a discussion on important of ROIC)

Return on Investment Capital (ROIC) which is Owner Earning/Invested capital. 

owner earnings = (a) reported earnings 

 + (b) depreciation, depletion, amortization, 

 - ( c) the average annual amount of capitalized expenditures for plant and equipment *

 - (d) change in working capital (Inventory)

- (e) cost of Stock Option **

Note: 

* Net CAPEX (CAPEX - Depreaciation) reduced by addition of new equity capital. 

** Cost of stock option includes issuance of new share below current NAV which results in dilution of interest to existing shareholder, reduces by sharebuyback at price below NAV. 

My ROIC concept will be different from Warren Buffet's or some of the text book as

1. I will treat receivables as fairly convertible to cash. 

  Although increase in receivables will means additional capital requirement from owner, that increase is much easier to recoup in cash form than inventory or Property , Plant and Equipment. 

3. Present Value (PV) per share for the company formula

PV = NAV * ROIC / Required Rate of Return

Where Required Rate of Return = Average dividend yield of KLCI company + Real GDP growth rate + Inflation rate

Note that the PV calculation will ignore the different risks for different company. 

4. Classification of Valuation Ranking

If i said a company is

a. Fairy Underpriced, current share price  below 50% of PV

b.  Underpriced, current share price between 50% - 75% of PV

c. Slighly  Underpriced, current share price  between 75%-90% of PV.

d. Fairy priced, price  between 90% - 110% of PV.

e. Slighly Overpriced, current share price between 110% - 130% of PV. 

f. Overpriced, current share price between 130% - 200% of PV. 

g. Fairly Overpriced, current share price above 200% of PV. 

5. Safety Margin for Investing 


I will further discount the PV with some safety factors which depends on, 


i. Debt to Equity ratio
ii. Net profit to interest cost ratio
iii. Whether ROIC is trending low
iv. Industry specific
v. whether director is major shareholder and hold controlling shares
vii. Others


Again, the disclaimer, 


Disclaimer
The data used will be  taken and calculated according to information supply from the company's quartery report and annual report available at the Bursa Saham website.
The author bear no responsibilities of any buying/selling action of the investor, and any profit/loss incur by the investor.