How to Analyze Company Stocks with WB Stocks
WB Stocks will help you analyze company stocks by calculating for you 13 of the 16 methods or financial KPI ratios Warren Buffett suggests are predicative of the return on investment in a particular company.
Lets explain more about the methods that we are using to analyze stocks. We are looking for a company that has Durable competitive advantage that we are gonna call d.c.a. (this abbreviation is important, because you are gonna see it in the table in the “Analyze Stock” section). We are gonna have 11 methods to search for if company has d.c.a. If company has one, the table in the “Analyze Stock” section will be colored in green if not the color will be red.
A little more about the methods/parametors. This are our criteria:
Calculating Gross Profit Margin. We are looking for a company with GMP bigger than 40%. If company has GPM lower the 20% that means that this company don't have d.c.a.
Calculate percentage of Gross Profit on Selling General and Administrative (SGA). We are looking for under 30%. That means that company has d.c.a.
Calculate percentage of Gross Profit on Research and Development. The lower is that percent there is better change that company has d.c.a.
Calculate ratio between Net Earnings and Total Revenue. We are looking for ratio bigger than 20%. If This ratio is smaller than 10% that means that this company does not have d.c.a.
Here we are looking for consistency in Earnings Per Share. Every year EPS should be bigger than the previous one.
Calculate ratio of interest payments to operating income. Here we have to compare different companies in one industry and see which one is with the lowest percent ratio.
Calculate ratio of Net Earnings to Total Assets. Again search for a company in same industry and find the biggest ratio.
Search for Long Term Debt. Here we have to find companies with little or no Long Term Debt.
Calculate ratio of Total Debt to Equity. We are looking for ratio less than 0.80.
Calculate Return on Shareholders Equity. Again search for a company in same industry and find the biggest ratio.
This method will show the goodwill integers. We have to see if the values increase over the years. This means that the company is out buying other businesses above book value.
Retained Earnings - The more earnings retained, the faster it grows and increases growth rate for future earnings.
Compare Capital Expenditures to Net Earnings. if historically using less than 50%, then good place to look for d.c.a. If less than 25%, probably has a d.c.a.
The Chain Reaction or what to look in a company and how to understand the stock market today
- Consistency in Product
- Does not have to invest repeatedly in R&D
- Does not have to invest in new Technology
- Therefore Money piles up in the company
- Resulting in lesser debt and therefore lesser interest payments and hence more money with the company to expand operations or buy back stocks which will drive up earnings and the price of the company stock
More picking stock guidance
Don’t worry, you are gonna see the results in a more structure way. But it’s good to know the idea of the book and our methods.
What else you have to look at? You can check what dividend the company will give to the shareholders and then calculate what percent is that value from the current stock price
Lets say company is giving 0.44$ in dividends per share. The stock price for that company is 11.80, so we can prognose that the next year we can have 3.76% interest only from dividends. But we also know that this company’s stock price have an average gain of 10% a year. So now we can prognose that this company will give us a 3.76% interest a year and it will grow every year with 10%.
When to buy?
Of course we can’t tell you exactly the moment when you have to buy a stock, because this is not exact science, but there are some methods that will help you. Buying in a bear market it is better, instead of buying in a bull market in a long term. Also you have to find a company that is undervalued. Very popular way to do that is with the P/E ratio. If it is under 20 that will be a signal that may be this company stock is undervalued.
When to sell?
Based on Buffett’s investment advice is to never sell your share in these businesses. The longer you hold on the better the gain. This is because when you invest in some company you invest not because of the shares that will come up or down, but because you think that this company has a great potential and idea and will prosper in future.
Sell when you feel the company might be losing it competitive advantage or you find some better deal to make. Another thing you have to look is if a company is overpriced. Again you can use P/E ratio, but here you have to see if the ratio is over 40.
If you thought what stock did Warren Buffett buy I hope you have already found the answer and I hope that this information will help in the web trading.