- Does the company have any identifiable consumer monopolies or brand-name products, or do they sell a commodity-type product?
- Do you understand how it works? This is, yes, another of those cases that you, the consumer/investor, have intimate knowledge of, and experience with using the product.
- Is the company conservatively financed? D/E Ratio. If not debt free can it pay outstanding debt easily
- Are the earnings of the company strong and do they show an upward trend?
- Management allocates capital only to those businesses within its realm of expertise
- Management utilizes capital to increase shareholder value when it is possible. e.g. buy backs
- The way management has spent the retained earnings of the company appears to have increased the per share earnings and, therefore, shareholders’ value.
Total EPS of last 10 years/Retained earnings for last 10 years > 15%
- Above average ROE > 15%
- Is the company free to adjust prices to inflation? e.g. FMCG companies able to increse price & pass inflation to customer
- Do operations require large capital expenditures to constantly update the company’s plant and equipment?
- Initial Rate of Return and Relative Value to Government Bonds
- EPS/Government bonds interest rate = Buying Price of Stock
- EPS/Buying Price = Initial Rate of return which you are getting
- Stock As an Equity/Bond
- If company maintains ROE of 15% for next 10 years and retains 60% each year, then equity PS grows at 9% (15%*60%), calculate Equity PS after 10 years (FV) = Current Equity PS(1+9%)^10
- Calculate EPS after 10 years = Equity PS FV * ROE at 10th year(Gustimates)
- Apply Highest and Lowest historical PE to EPS and get stock price range after 10th year
- Project an Annual Compounding Rate of Return Using the Historical Annual Per Share Earnings Growth Figure
- Estimate EPS growth rate, and calculate, 10th year EPS
- Apply Highest and Lowest historical PE to EPS and get stock price range after 10th year