Use this free Excel spreadsheet to analyse and evaluate U.S. stocks listed at the NASDAQ or NYSE. Five valuation model are available, along with Piotroski, Dupont, Altman Z-score and earnings power analysis.
How to use the sheet
1: Go to Morningstar.com and enter the name of a stock in the top search box
2: Select the stock, and in the stock page, click on Key Ratios tab.
3: Download the financials data.
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This is how the data sheet looks for Apple Inc.
4: Now open the freefincal stock analyzer (download link below) and follow the steps listed in the inputs page.
This will copy the financials from the morningstar file and the rest of analysis is automated (with the exception of a few subjective inputs).
5: Stock price history can be obtained from Google Finance via a macro. Update: See below
Before we consider each valuation method, the Read me first sheet gives an overview of all features available.
The financial data can be analysed (rolling growth in EPS, operating margin etc.) and visualised via graphs in the Analysis and Graphs sheets.
Earnings Power Box
This is a plot of two the Defensive EPS (earnings per share) vs Enterprising EPS
The idea is to spot where a company falls in.
This is based on: Earnings Power Valuation Model
Enterprising EPS = (Enterprising Income)/(Shares Outstanding)
Defensive EPS = (Defensive Income)/(Shares Outstanding)
Enterprising Income = Net Income – (15% x total capital)
15% here is the weighted average cost of capital (WACC) and is an expected return. You can modify this for each FY and for each stock.
15% x total capital = enterprising interest.
Defensive Income = Free Cash Flow – change in working capital since last FY.
Please read more about these assumptions here:
It’s Earnings That Count: Forget the next Infy; Can you identify the next Satyam? (Infy is an Indian mutli-bagger and Satyam a company caught in scams)
and here: Pros & Cons of Finding Stocks with Earnings Power for Long-Term Profits
Earnings power box for Apple Inc.
Altman Z-score analysis
The Z-score is a measure of financial health and in particular, how close the business is to bankruptcy.
The Z-score is the weighted sum of 5 ratios. The analyzer can be used to study the historical values of these ratios for the last nine financial years. The ratios are referred to as X1, X2, X3, X4, X5
X1: Working Capital / Total Assets
Working capital is a measure of liquidity and how much cash the business has to pay current obligations. While the working capital can be temporarily negative, a sustained negative trend over time could indicate trouble.
X2: Retained Earnings / Total Assets
If a company has high retained earnings, it is retaining cash for operations instead of paying out dividends. Higher this ratio, lower the reliance on borrowing and debt.
X3: EBIT / Total Assets
EBIT is the earnings before interest payments and tax. So this is a measure of profitability. Altman refers to this as a “true measure of productivity”.
X4: Market Value (cap) of Equity / Total Liabilities
Any dramatic drop in this ratio is a sign of poor financial health.
X5: Net Sales/ Total Assets
Also known as the capital turnover ratio, this is a measure of ability to generate sales and also steer clear of competition.
The Altman Z-score is measured by multiplying each of these ratios by a factor and adding them up.
Z (1968 version) = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Automated Return on Equity Analysis with the Dupont Formula
Return on equity is defined as
ROE = Net income/shareholders equity.
It is the profit for each unit of shareholders equity or the earning power of the company. If there is a gradual increase or decrease in ROE, it is beneficial to dig deeper and find out the reasons behind the trend.
Deconstructing the ROE into multiple factors helps us understand the factors that drive the ROE change. This was first doneOpens in a new window by DuPont explosives salesman Donaldson Brown in 1912 and hence the name Dupont formula.
In its modern form, the ROE is written as a product of five ratios.
Thus the ROE is the product of
- Financial leverage
- asset turnover
- operating margin
- interest burden
- tax burden.
- The financial leverage is a measure of a companies debt. Higher the leverage, higher the borrowing and it could result in an increase in ROE! Therefore, if a fall in ROE is driven by a fall in financial leverage it is probably a good development.
- Asset turnover is a measure of how well assets (including debt) are used to generate profit. An increase in ROE coupled with an increase in asset turnover is desirable. Decreasing asset turnover but steady/increasing revenue could imply the presence of unproductive assets.
- Operating margin can be thought of as the profit left over after paying for production costs. A healthy operating margin is necessary to pay back debt. An increase in financial leverage should soon result in an increase in operating margin!
- Interest burden represents the extent interest that has to be paid out to lenders. When financial leverage increases, interest burden will also increase.
- Tax burden is a measure of the taxes that has to be paid. When interest burden increases, tax burden will usually decrease.
As with all financial ratios and balance sheet entries, these are heavily industry dependent.
Snapshot of ROE analysis for Apple Inc
Piotroski Score
In January 2002, Prof. Joseph Piotroski wrote a paper titled, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from LosersOpens in a new window which detailed a method of buying stocks based on 9 balance sheet based criterion. It is now known as the Piotroski Score or the Piotroski F- Score. He presented a back-testing study which supported the utility of the method.Value investorsOpens in a new window could have increased their returns by 7.5% if they had used this method 20 years ago.
Here is the list of criteria used to calculate the Piotroski Score. This and the calculation in the sheet is based on Building a Financial ModelOpens in a new window
Piotroski Score Metrics
- Return on Assets (ROA): Net income relative to (divided by) total assets. One point if positive. Zero if negative.
- If this financial years, ROA is greater than previous financial years ROA, one point. Else zero.
- Cash flow return on assets (CFROA): Operating cash flow relative to total assets. One point if positive. Zero if negative.
- If CFROA is greater than ROA, one point. Else zero. This measures the quality of earnings.
- Leverage = long-term debt relative to total assets. If leverage has decreased this financial year, one point, else zero.
- Liquidity. The Current ratio is current assets divided by current liabilities. One point if last reported current ratio is greater than that for the previous financial years. Else zero.
- One point if the shares outstanding has remained the same or decreased. Else zero.
- Asset turnover: Total sales relative to total assets. One point if this is higher than that for the previous financial year. Else zero.
- Gross margin: Gross profit relative to sales. One point if higher than that for the previous financial year.
With these metrics a company can be given a Piotroski Score. Higher the score, better the strength of the company and confidence in its operation.
This is the calculation for Apple INC
Valuation Models Available (click links for details)
1) Price Multiple Model
2) Sustainable Growth Rate
3) Book Value Growth Rate (Buffett’s approach to valuation)
4) Discounted Cash Flow (DCF)
6) Graham formula and Graham number
7) Earnings Growth Estimate
Other Screenshots
Download Link
The tool is currently being modified.
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