The Intelligent Investor's Checklist

Benjamin Graham developed criteria that can be used to identify potential Common Stocks that are undervalued. Here is a superficial summary of some of his criteria:

Benjamin Graham's book

1. Size. Annual revenue > 2billion
2. P/E. Price less than 15x average earnings (per share) of last 3 years (calculate this yourself)
3. P/Book. Price < 1.5 last reported book value.
4. Current Ratio. Current assets should be at least 2x current liabilities. This gives a cushion of working capital to sustain the company through hard times. Also, long term debt (including pref shares) should not exceed net current assets (working capital)
5. Earnings Stability. Must have some earnings in each of the last 10 years. (Negative operating expenses, but positive financing expenses is a concern)
6. Dividend Record. Must be uninterrupted for 20 years. Increasing dividends is best.
7. Earnings Growth. Minimum increase of 33% in per-share earnings over the past 10 years. To calculate, use the EPS avg of 3 years at beginning vs 3 years at end (or use that website / excel spreadsheet)
8. Exchange Rate - Buy US stocks when CAD strong
9. Intangibles - strong management, owned by top investors, insiders buying

Other Definitions:

Diluted EPS = EP(S + Warrants,Options,Convertible Pref Shares). Always less than EPS, a more conservative metric.

Ratios. Can be broken up into four types. Should always be applied across an industry.

• Valuation Ratios. The price-to-earnings ratio (P/E ratio) is calculated as a stock’s current share price divided by its earnings per share (EPS) for a twelve-month period (usually the last 12 months, or trailing twelve months (TTM)). High PE may indicate that you are overpaying, or it may indicate that the company has greater future growth&earning potential than others with lower PE. PE in stable, mature industries tend to be lower than PEs in industries that are young & have upside.
• Profitability Ratios. Profit Margin = Net Income / Revenue (decreasing year after year is a red flag).  Operating Margin = Operating Income / Net Sales.
• Liquidity Ratios. How quickly can a company raise cash to purchase additional assets or repay creditors quickly. Account Receivables Turnover = Net Credit Sales / Avg Accounts Receivable. High ratio means the company can collect accounts receivable frequently (good liquidity), whereas a lower ratio may mean clients aren’t paying up in time.
• Solvency Ratios. a picture of how well a company can deal with its long-term financial obligations and develop future assets.Total Debt to Total Assets = Short&Long term debt / Total Assets. The total debt to total assets ratio is used to determine how many of a company’s assets were paid for with debt.