Selection of market winners using the Graham-Ri method
B. Graham and J. Ree in 1970 with Gt. offered investors an original approach to the selection of companies for investing on the basis of the multiplier "price-earnings", a number of financial balance indicators and the total yield of the bonds of the highest rating (AAA). Note that the selection of investment-attractive companies does not include issuers with high financial leverage and a high multiplier value-price-earnings ratio. Companies with a high profit growth rate are welcome. The approach was implemented not only by the investment fund of the authors (Rea - Graham Fund), but also by a number of other US investment companies (LMHFund, Sequoia Fund, Pacific Partners Fund).
The model involves getting answers like "yes" and & quot; no & quot; to 10 questions for identifying shares that have the highest premium-risk ratio. " The algorithm for selecting shares is structured as follows:
How to ...
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1. A sample of companies is being constructed, according to which the following financial indicators are calculated (Table 26.1).
Financials for the Graham-Ri model
Method of calculation
Debt/equity ratio & quot; (D/E)
Calculated by the balance estimates. As a debt, all debt obligations appear
Calculated on financial statements: Current assets/Current liabilities
Purified value of current (short-term) assets
Calculated on the company's financial statements: Current assets - Total debt
Purified value of current assets per share
(Current Assets - Total Debt)/Number of Ordinary Shares in Circulation
Book value of shares
Equity capital by balance sheet/Number of ordinary shares in circulation or
(Balance Currency - Total Debt)/Number of Ordinary Shares in Circulation
Net Income/Number of Ordinary Shares in Circulation
Annual EPS growth rate
Price/earnings multiplier (P/E)
Market capitalization/Net profit
Average multiplier P/E for the year for the stock
Average annual market capitalization/Net profit for the year
2. Discarded shares of the sample, for which the first question received a negative answer, i.e. remain the company-issuers with a small financial lever.
3. The remaining companies discard those for whom the answer is yes & quot; on one of the questions under the numbers 6, 8, 10 (that is, on the basis of the analysis of the dividend yield and the ratio of the market price and the balance valuation of the stock).
Assume that the yield of highly reliable bonds is 12%. The return value of the yield will be 1/0,12 = 8,333. Half of the inverse value is 4.1666. The multiplier P/E for companies included in the sample should be less than 4.1666. If the yield of highly reliable bonds is 7%, the multiplier PIE for companies included in the sample should be less than 7.14. If the multiplier is larger, then a negative answer is given to question 6 (no).
4. The remaining companies are potential "market winners".
Graham-Ree questions for forming an investment-attractive portfolio of shares (answer is required "yes"/"no")
1. Ratio & quot; total debt/equity & quot; is less than one?
2. Is the current liquidity ratio greater than two?
3. The total debt is less than the doubled purged value of current (short-term) assets?
4. The growth in earnings per share (EPS) over the past 10 years has averaged at least 7% per year?
5. From the last 10 years of observations, the annual EPS growth rate did not fall below minus 5% for at least two years?
6. Current multiplier "price-earnings & quot; less than half of the inverse return value of bonds rated AAA?
7. The current multiplier P/E is less than 40% of the largest average multiplier over the past five years?
8. The dividend yield on a share is equal to not less than 2/3 of the yield on highly reliable bonds?
9. Is the market price of the share less than 2/3 of the book value of the share?
10. Is the market price of the share below 2/3 of the cleaned value of current assets per share?
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