Whether the stock market is in bullish phase or in correction mode, there are ample opportunities for investors to make money. Finding such opportunity is easier said than done, especially in the absence of analyst coverage or actionable information on your fingertips.
Analysts tend to focus on large-caps and popular stocks. As these stocks are widely tracked, the room for companies to surprise on any new news gets limited. Analysts typically cover about 400 stocks picked up mainly from BSE500. It is about 12-15 percent of 2,500-3,000 stocks traded at exchanges, leaving many companies open for discovery.
Actionable information, on the other hand, can provide insight on company’s fundamentals for investment decisions. It can be obtained by analyzing huge amount of structured data. It is a cumbersome process and requires specialized skills. For individual investors, it would be a daunting task.
To address these two needs, Heckyl has developed Health Score to gauge financial health of all the listed companies worldwide. It is a composite financial performance score computed by analyzing financials, key ratios and performance indicators. It is based on five main pillars. They are value (scans stocks with cheap or expensive valuations), growth (how the company has grown over the years), past performance (compares key profitability ratios with industry average), quality (assess balance sheet strength) and dividend (finds whether company is good at rewarding investors or not).
To measure the effectiveness of Health Score, we conducted a study on 1,203 companies with market capitalization of over Rs 100 crores. We looked into performance of Health Score for the last six-months. Our study highlighted improvement in fundamentals of 413 companies. At the same time, it has shown deterioration in fundamentals of 647 companies. For 143 odd companies, Health Score remained unchanged.
We shortlisted two companies to show how the share price has actually moved in tandem with company’s Health Score during the last six-months. We found sharp increase in share price of Royal Orchid Hotels on the back of improvement in fundamentals. On the other hand, Jindal Saw witnessed deterioration in fundamentals, which translated into decline in share price.
Royal Orchid Hotels, an operator of 22 hotels and restaurants in 13 cities, witnessed substantial improvement in Health Score, led by performance of growth indicators. Health Score moved up from 30 in September last year to 56 in March 2016.
Recently, Royal Orchid reported a rise of 23 percent in net profit for quarter ended December 2015 to Rs 2 crores. Meanwhile, the company’s revenue grew 7 percent during the quarter to Rs 24 crores.
Earlier this year, SBI Mutual Fund has sold its entire 8.4 percent stake in the company. Surprisingly, the stock reacted positively to stake sale with gain of over 30 percent in 3-days. However, it came off from high to settle the month of January with 12 percent gain. In the last six-months, shares have rallied over 52 percent.
Below image shows composition of Health Score:
Royal Orchid Hotels: Health Score Screen 1
Each of the five pillars are further broken down in five key ratios/ performance indicators. In all, there are 25 five key ratios/ performance indicators. Each indicator is followed with a note on performance (see below image).
Below Health Score image highlights five indicators based on value:
Royal Orchid Hotels: Health Score Screen 2
Steel pipe maker, Jindal Saw has witnessed a sharp decline in Health Score due to poor show on growth indicators and past performance. It dropped from 60 in September 2015 to 36 in March 2016.
Jindal Saw has recorded a steep fall in earnings and revenue for the December 2015 quarter. During the quarter, profit plunged 37 percent to Rs 39 crores, while revenue declined 39 percent to Rs 1,077 crores. Poor financial performance weighed on the Health Score.
Deterioration in fundamentals has also reflected in share price with a drop of 39 percent in the last 6-months.
Below Health Score image highlights performance of growth indicators:
Jindal Saw: Health Score Screen 2
Health Score is very useful tool for quick assessment of fundamentals of any company. It not only helps in finding gems from neglected stocks, but also gives early warning about deteriorating fundamentals of a company. Performance of Health Score in above listed companies has already priced in the stocks to a large extend. Plenty of stocks in the market are currently yet to catch up with changing fundamentals. So don’t wait, try Heckyl’s Health Score now.
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