Tip 6 – What is the Score and how to use it?

The higher the score, the safer the investment. The range is 0 – 20 where 0 is bad and 20 is good. This represents the overall financial strength of the stock.

If a stock has strong financials, it’s proving to investors like you and I that’s it’s a good investment.  The chances of losing money over the long term on a stock with a high score, is very small.  In other words, if you invest in a company that’s working hard to keep financials extremely healthy, you have a high probability of making money.

Let’s break down the points and how they are achieved.  You may also find these scores and the definition of each score on the why page of each stock within Tykr.

ROIC (Return on Investment Capital) – Maximum score is 6/6
Return on invested capital (ROIC) is used to determine a company’s efficiency at allocating capital to profitable investments. The higher the score, the more effective a company is using its capital to generate returns.

On the Income Statement, the data points you’ll want to pay attention to most include:
• Income Tax
• Net Income
• Interest Expense
• Depreciation and Amortization

On the Balance Sheet, the data points you’ll want to pay attention to most include:
• Debt
• Equity

EQUATION:  EBITA/(DEBT+EQUITY)

These variables factor into the Return on Invested Capital.  If the ROIC is increasing from year to year, this is a great sign.

Equity GR (Equity Growth Rate) – Maximum score is 3/3
Equity represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off. The higher the score, the more the company is growing its equity year over year.

On the Balance Sheet, the data point you’ll want to pay attention to most includes:
• Equity

If Equity is increasing from year to year, this is a great sign.

EPS GR (Earnings Per Share Growth Rate) – Maximum score is 3/3
The higher the EPS, the more profitable a company is considered. The higher the score, the more the company is increasing its EPS year over year.

On the Income Statement, the data point you’ll want to pay attention to most includes:
• EPS

If EPS is increasing from year to year, this is a great sign.

Sales GR (Sales Growth Rate) – Maximum score is 3/3
Sales represent the revenue of the company. The higher the score, the more the company is increasing its revenue year over year.

On the Income Statement, the data point you’ll want to pay attention to most includes:
• Revenue

If Revenue is increasing from year to year, this is a great sign.

Cash GR (Cash Growth Rate) – Maximum score is 3/3
Cash is the cash that a business has available. A business with more cash available is going to be better prepared for economic downturns. The higher the score, the more the company is increasing its available cash year over year.

On the Cash Flow Statement, the data point you’ll want to pay attention to most includes:
• Free Cash Flow

If Free Cash Flow is increasing from year to year, this is a great sign.

Payback Time (Time for an investment to double) – Maximum score is 1/1
10 years or less = 1 point.  Payback Time is the estimated time it will take for the stock to double. This is calculated based on the growth rate of the stock price. This number should not be taken literally. Payback Time should be used as a comparing tool against other stocks. Important Note: If the Payback Time is 0 or a negative number, that means the stock is underperforming.

MOS (Margin of Safety) – Maximum score is 1/1
Greater than 50% = 1 point.  The higher the MOS (Margin of Safety) the higher potential returns you will make. MOS is the difference between the share price and sticker price where sticker price is the real value of the stock.

As you can see, the maximum score that may be achieved is 20/20.

Related Posts