Dakshinamurthy- an invocation to learning is used here to analyze stocks. Of the various methods, this is one of the methods I have suggested to study stocks and my belief is that given the various parameters that are used in analyzing the stock, it is expected that most of the stocks analyzed this way will hold your investment ship steady for long. Like no one can predict future, there is no guarantee of these predictions going right as based on past data, but the past path that has been laid is a sign or indication that the future paths will also move in the right direction.
How to go about this analysis.
I believe, a 5 year trend is neither too short or too long a period to analyse the stock. In an economic situation where every year changes, a look too far in the past may not provide the same perspective as a medium term analysis. Thus a 5 year trend is preferable.
Second, the rating range is given. Rather than someone rate for you, it is better you rate to ensure consistency in the rating and as per your liking. Thus a high debt may be to your liking and may give a 6 or 7, while a person who shuns debt may give it 1 in case of high debt companies. Thus this analysis, rather than imposing someone's thought, tries to help you understand the business and rate it. This is an important learning as you gain confidence and convincing in a company you invest and can blame yourself and not others in the path of investing.
Third, I have provided a rough range as a guide and not fixed what should be the total at the end that gets you to a thresh hold that should make you comfortable in investing. This is because each individual is different and has to take his own responsibility/call to invest.
Fourth, I have below this formula given a brief of what each of this item means, which could guide you and make you learn in the art of investing.
| 5 years trend | ||||||
| D | Debt | 1-10 | Zero debt 10, high debt 1 | |||
| A | Asset Return | 1-10 | ROCE- @20%(10), less 1-9 | |||
| K | Capital | 1-10 | Adequate funding/Promoter holding high/<10% 1, >70% 10 | |||
| S | Sales Growth | 1-10 | Last 5 years Sales growth every year @10%10, else 1-9 | |||
| H | Human Resources | 1-10 | Quality of HR/Attrition rate/Key mgt. change | |||
| I | interest coverage | 1-10 | EBIT/Interest | |||
| N | Networth | 1-10 | Reserves sufficient/P&L balances | |||
| A | Analysis-Ratio | 1-10 | OP Margin/GP Margin -growing-20% | |||
| M | Money-Cashflow | 1-10 | Consistent Free Cash flow | |||
| U | Understanding of business | 1-10 | What business/moat/future growth | |||
| R | Rate of Profit Growth | 1-10 | Last 5 years Profit growth every year @10%10, else 1-9. Rolling Returns growth |
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| T | Type of Business | 1-10 | Nature of business-Steady (10), cyclical (5) | |||
| H | High/Low Trend of Share prices | 1-10 | Volatility / PE (<15,10) (>20,5) | |||
| Y | Yield of Dividend | 1-10 | Consistent Dividend trend, yields etc. |
| Assumed meaning of the terms used above | ||||||||||||||||||||||||||||||||||||||||||||||||||
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| Payout. What Company is ready to pay out. Cap. Allocation |
