With the market
getting bumpy, it’s time to start paying attention to
fundamentals, especially, financial strength.
Firms strong in that department
will be better equipped to deal with unexpected
market turns than those that aren’t.
Here are five quick tests that you
could use to evaluate your stocks financial strength, which I call
“fiscal fitness.” I’ll describe the tests using data from “Seeking
Alpha,” but you may find the same information on other sites.
I’ll check the scores for Delta
Airlines (DAL), General Motors (GM), Microsoft (MSFT), Shopify (SHOP)
and Tesla (TSLA).
To start, from the Seeking Alpha
home page, (seekingalpha.com),
enter a ticker symbol; click on “Financials,” and then select “Overview.”
Once there, you can select the same page for other stocks by simply
entering a new ticker in the top Search window.
We’ll start by checking
Profitable firms are best able to
self-fund growth. Use profitability gauge Return on Assets (ROA), which
compares net income to total assets. Positive values reflect positive
earnings (the higher the better) and vice
versa. Score one point for ROAs above 10, and subtract one point for
negative ROAs. Here are the ROAs 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 (current
assets divided by current liabilities) to determine if a firm has enough
current assets (cash, inventories & receivables) to pay current
liabilities (payables). Ratios are above one when assets exceed
liabilities, and vice-versa. Score one point for ratios above 2.0, and
subtract one for ratios below 1.0.
Delta: 0.9= -1, General Motors
1.1= 0, Microsoft 2.3 = 1, Shopify 17.1 = 1,
Tesla: 1.7 = 0.
Bookkeeping rules sometimes make
firms appear profitable when in fact; cash is flowing out, rather than
into their bank accounts. “Net Operating Cash Flow” is the cash that
flowed into, or out of, a firm’s bank accounts resulting from its basic
operations. Obviously, cash flowing in is better than cash flowing out.
Add one point for positive values and subtract one point for negative
Delta: -$3 billion = -1, General
Motors $16 billion = 1, Microsoft $73 billion =1, Shopify $646
million = 1, Tesla: $8 billion = 1.
Got Free Cash
Free Cash Flow
is excess cash that a firm does not need to
fund its basic operations. It could be used to cut debt, fund expansion,
raise dividends, etc., all happy events for shareholders. Add one
point for positive free cash flows and subtract one point for negative
Delta: -$4 billion= -1, General
Motors -$14 billion = -1, Microsoft $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 capitulation). Ratios below 50% signal low debt. Award 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.
Adding up the fiscal fitness scores, we get: Delta -5,
General Motors 1, Microsoft 5, Shopify 4,
Tesla 3. Positive scores reflect strong financials,
which is a good start, but many other factors come into play in
determining whether you’ll make money owning a stock.