Analyzing business – Modeling

Analyzing business – Modeling

The last few days I have been thinking if there is a sense in analyzing and trying to search for stock ideas, when you believe that everything around is so overvalued. Is it not just wise to sit and wait for better investment days to come?

Well, I thought so but now feel corrected.

While my discomfort with current overall valuations continue to remain. There are frequent stories of turnaround and undervalued picks still moving around. While they coming to my notice however looks rare because of the simple denial –“ I have seen them at lower levels and therefore they look overvalued or not worth analyzing”. Or “simply, it’s a con story”.

Well now I believe this is the time to actually track ideas which you liked and find similar picks in similar sectors. For all I need to do is wait for the stock to correct or be available at a lower rate and I can pounce on it, provided I have done my research.
And to do the same I have built upon a simple model to maintain track- based on 10 parameters.

The 10 parameters are:

  1. Growing operating profits
  2. Growing net income
  3. Earnings quality = measured by operating cash flow is more than net income.
  4. Increase in return on assets

Capital structure

  1. Decreasing debt ratio
  2. No equity dilution – not more than 5% in a year. Till 5% could be due to some ESOPs
  3. Increasing net working capital.


  1. Improving gross margins- reflects nature of industry and ability to cut down on costs over time.
  2. Assets turnover

Insiders view:

  1. Change in promoters stake.

All these are business related parameters and a good judge for how the company has been doing. Perhaps at a later day I would like to link these to movement in their respective industry parameters and relate it to valuations.
I have automated the function to bloomberg and would be glad to send such information to anybody who desires. Will keep you updated on the model.

Meanwhile would appreciate if you could comment on the parameters used. While analyzing business, while most parameters look important and there are a host of them, I have knowingly limited the no of parameters- so any additional parameter will essentially be to replace the existing one. A 10-pointer scale is easy to read.

The rating is Binary.

The parameters used are influenced by  Piotroski.


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