First Level of Stock Screening

The first level of business analysis (or stock screening) uses only information freely available in the public domain. It allows the lay investor to understand and quantitatively measure the four dimensions of a business:

1. management quality
2. business fundamentals
3. financial strength
4. intrinsic value

The seven step screens will be able to help identify a good investment opportunity. However, the individual screens must not be used in isolation as it will not correctly represent the entire business quality.

Reference texts:
- The Intelligent Investor by Benjamin Graham
- Buffettology by Mary Graham
- What is value investing by Larry Cunningham

Management Quality
Is the management of an unquestionable integrity, holds a vested interest, highly competent and shareholder oriented?
- CEO/Chairman/Executive Directors > 10% stake
- Executive Officers > 10 years industry experience

Business Fundamentals
Does the company have a significant profit margin for its products and services, with a high Returns on Equity?
- Profits / Equity > 1.15 or 15% ROE

Does the company possess high barriers to entry and a durable competitive edge?
- Low cost producer enjoying significant economies of scale
- Strong brand with ability to set prices

Does the company have products and services with sufficient market potential to expand the company to twice its size in 5 years?
- Growth drivers
- R & D efforts: R&D / assets

Financial Strength
Does the company require massive amounts of debt and equity financing to sustain its growth and profits?
- Current Assets / Current Liabilities of > 1.5

Is the company effective at managing its cash flow?
- Operating Cash Flow / Current Liabilities > 1.5

Intrinsic Value
Is the company at an attractive valuation with a significant margin of safety?
- Net Tangible Asset / Price > 1.0
- Intrinsic Value (Discounted Cash Flow) / Price > 1.5