With the market slowing down, it is time to pay attention to fundamentals, especially financial strength. Companies that are strong in this department will be better equipped to deal with business slowdowns than those that are not.
Here are five quick tests you can use to assess the financial strength of your stocks, which I call “financial fitness.” I’ll use data from Seeking Alpha to describe the tests, but you may find the same information on other websites.
I check the scores for Delta Airlines (ticker: DAL), General Motors (GM), Microsoft (MSFT), Shopify (SHOP) and Tesla (TSLA). First, on the Seeking Alpha home page, enter a ticker symbol; Click on “Finance” and then select “Overview”. There you can select the same page for other stocks by simply entering a new ticker in the search window above.
We start with the profitability test.
Profitable companies are best placed to finance their own growth. Use the Return on Assets (ROA) meter, which compares net income to total assets. Positive values reflect positive returns and vice versa. Score one point for ROAs over 10 and subtract one point for negative ROAs. Here are the ROA and point values for each stock:
Delta: -10% = -1; General Motors 3% = 0; Microsoft 14% = 1; Shopify 3% = 0; Tesla: 3% = 0.
Assets vs. Liabilities?
Use the current ratio (working capital divided by current liabilities) to determine whether a company has enough working capital (cash, inventories, and receivables) to meet its current liabilities (liabilities). The ratios are above one when the assets exceed the liabilities and vice versa. Give one point for ratios above 2.0 and subtract one point for ratios below 1.0.
Delta: 0.9 = -1; General Motors 1.1% = 0; Microsoft 2.3% = 1; Shopify 17% = 1; Tesla: 2% = 0.
Bookkeeping rules sometimes make companies appear profitable when they are actually profitable; Cash is more likely to flow out than into their bank accounts. “Net operating cash flow” is the flow of money that flowed into or withdrawn from a company’s bank accounts as a result of its basic business operations. Obviously, cash inflow is better than cash outflow. Add one point for positive values and subtract one point for negative cash flow.
Delta: $ -3 billion = -1; General Motors $ 16 billion = 1; Microsoft $ 73 billion = 1; Shopify $ 65 million = 1; Tesla: $ 8 billion = 1.
Free Cash Flow?
Free cash flow is excess cash flow that a company does not need to finance its basic business. It could be used to reduce debt, fund expansion, raise dividends, etc., all happy events for shareholders. Add one point for positive indebted free cash flows and subtract one point for negative values.
Delta: $ -4 billion = -1; General Motors-$ 14 billion = 1; $ 38 billion = 1; Shopify $ 491 million = 1; Tesla: $ 4 billion = 1.
Too Much Debt?
Long-term debt to total capital, a leverage measure, is the debt percentage of total capital (debt plus market capitalization). Quotas below 50% indicate a low level of debt. Give one point for ratios below 60% and subtract one point for ratios above 80%.
Delta: 86% = -1; General Motors 46% = 1; Microsoft 33% = 1; Shopify 10% = 1; Tesla: 28% = 1.
If we add up the fiscal fitness values, we get: Delta -5, General Motors 3, Microsoft 5, Shopify 4, Tesla 3. Positive values reflect strong financials, but many other factors play a role in deciding whether or not to start owning from a. Make money stock.
Aptos’ Harry Domash publishes Winning Investing and Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.