Three step fundamental process :

The fundamental approach to stock selection has been broken down into a three step process.  The first two steps focus on the business performance and the quality of the earnings, followed by the third step, determining the valuation in the marketplace

Details :

Business Performance

We are essentially providing a scorecard of management; Return on Capital Employed tests the effective deployment of resources across the enterprise in general, Return on Equity considers the rate of return to equity in particular. The Operating Margin indicates pricing power, while EPS Growth and Free Cash Flow give a feel for future value.

Quality of Earnings 

We look for “Quality” of earnings, earnings such as this should be viewed with greater confidence and, by implication, others treated with more caution. These following metrics are intended to test the underlying reliability of the business performance. Cash Realization Ratio, Asset Replacement Ratio, Tax Rate, Debt to Equity and Interest Coverage.

  Valuation

The following measures connect the economic performance of the business to its market value in various ways. The Price/Earnings Ratio is a payback indicator; the Price/Book Ratio reflects the valuation of the company’s equity. The Dividend Yield and Free Cash Flow Yield reflect tangible and potential monetary rates of return, respectively. Enterprise Value/EBITDA is a general “structure-neutral” cash-generation multiple, and Enterprise Value/Sales indicates “volume leverage.”