Tuesday, April 14, 2015

Getting conviction: Fundamental Factors

Fundamental factors are typically the numbers in the game for the intelligent investor. In this section one typically looks at:

  • ROE and ROIC over the years and their volatility
  • Dividend percentage of earnings
  • Net profit after tax margin
  • EBITDA margin
  • PAT Growth
  • Working capital usage as a % of sales (Debtors, creditors and inventory)


Things to watch out for:

  1. Foreign exchange exposure – some companies may be completely dependent on imports and will be impacted by a negative movement of their base currency. Others will be net exporters and gain for currency movement. Our job as value investors is not to predict the currency movements but to understand how the business will fare when the currency moves one way or another.
  2. Goodwill accounting – this is capitalization of high acquisition costs. Too much good will on a balance sheet is never a good thing. Many highly acquisitive companies will have this issue and it needs to be analysed on a case to case basis. What you need to study is whether each of those acquisitions make sense or not.
There are several more things to watch out for which will be covered in the future posts.

This post is a continuation of the following two posts: