had a "bit of" trouble getting this on the page, missed this last part-- Looking through these, imo, you can see how hard it is to grow rev strongly and control CFO/PBT. Slower growth gives more control and less risk I suspect. Many that have strong growth have blown out the cfo/pbt lines, now they need to slow growth to get control over the cfo/pbt losses!

Hope someone found this interesting. Anyone for the poor charts?—there are a few ????

Disc-currently own CGS IRL/SM—probably should own more

This is not advice DYOR

@slymeat of course, you are right, there are no short cuts in investing, it is a start not the end, also it tells you a bit about the market appetitte for risk and different investors ie where they lie on the risk/reward spectrum. btw im impressed with the typing skills would take me all day to type that out :)

Ditto!

@Solvetheriddle, Interesting charts, thanks!

Phil Town talks about “The Big Five” fundamentals in his book “Rule#1”, however this approach may not have much relevance to pre-profit businesses.

This is his “Big Five”

Phil goes on to say:

And when looking at the other four growth rates, he says Equity Growth is the most important:

I agree with Phil Town on the priority of these metrics.

Rather than ROIC I use ROE, but you need to consider the level of debt when using ROE because borrowed capital props up the ROE and contributes to risk. ROIC takes into account all the capital used to generate earnings.

When you think about it a quality business with a strong moat has a consistently high ROE and EPS = ROE x Equity per Share. If 100% of the earnings are reinvested back into the business each year, then YOUR Equity in the business will compound by the ROE% each year just like compound interest (see Codan example below). If you want to know how long it will take to double your equity in a business, you simply divide 72 by the ROE.

This is why McNivens StockVal Formula makes so much sense to me as a valuation tool. The most critical variables in the formula are ROE and Equity.

@Bear77 and @slymeat, in regards to yet another lengthy straw in this thread, Mark Twain sums it up very well! :)

Cheers

Rick

@Solvetheriddle, If you like these ‘wriggly lines’ (like I do) you can get all these and much more on Simply Wall Street for less than $1 per day (unlimited stocks, world-wide) You just type in the ticker and it’s all there! You can even get 5 reports per month for free!

The fundamentals are also on the same scale so you can quickly see the relative margins of each. If you want to know what the analysts think, the forecast chart shows you this also. Just a warning though, I ignore the DCF valuations…I think these are BS on SWS!

I think It saves a lot of work creating these yourself and it’s we’ll worth the money. The nice thing about SWS, is they also reward loyalty by Grandfathering your initial subscription price (providing you don’t cancel).

I also have your #2 Cogstate (CGS) on my watch list. Below are the historical and forecast SWS charts for comparison. I like the business and the fundamentals, I just think it’s still too expensive and the share price is in a down draft (see lower charts from Commsec)

Disc: I don’t own Simply Wall Street, and I don’t get a cut! :) I don’t own CGS.

Source: Simply Wall Street

Source: Commsec 2/9/2022

@Rick Out of interest, I put in only two of the "big five", the 10-year revenue and EPS CAGR of 10% into a TIKR screen. Only produced 21 companies! I thought there would be a few more options... Anyways here are the results from that screen below. The results are interesting as almost all of the companies that are in the list have often been referred to as being "high quality" (or at least were considered to be for a period of time).

Isn’t the market efficient at finding and pricing the “big 5”?

An Interesting list @Dominator, and some of these have been on my radar at different points in time. As a first cut my preference would be to screen for consistent high ROIC or ROE to find the businesses with potential MOATS. What does that list look like? Then go from there.

I think @slymeathit the mail on head when it comes to using and interpreting historical chart information:

“A chart never shows cause, just always a reaction, and it is always lagging”

So we are always looking in the rear view mirror. The most difficult part is projecting forward. Historical trends can give us false security about predicting the future - “Past performance is not necessarily indicative of future performance.”

I’ve heard @Strawman talk about the dangers of extrapolation on the Baby Giants podcast.

Take BHP for instance, If you were a pure fundamental chartist relying on historical performance you would be buying BHP today like there is no tomorrow!

As a BHP shareholder its been a very rewarding ride in recent years, but we all know this trend can not last!

To wrap it up I quote from @slymeat comments again (that’s twice in one straw)!

You always have to keep an eye on what the business is doing.

@mikebrisy I would say the market is mostly right on the “Big 5” and often it overvalues these stocks. However, sometimes it throws great businesses out at bargain prices, and it’s not always obvious at the time. If everyone else is throwing it out, there must be something wrong with it. Right? These could the opportunities! But you might be wrong and the market turns out to be right. Investing isn’t easy!

@Rick right. So in addition you’d look at p/e (or other Val multiple) over time, and be sure to buy when relatively low for the particular stock. E.g. Bottom quartile over the 5-10 year period. You are right that the market serves up these opportunities from time to time, but you have to be very patient. I am getting better at this. That’s why I now always hold some cash or broad index investments. Because when the “big 5” opportunities arise driven by macro, I’ve found it hits higher beta stocks harder, so if you have to rotate out of these to generate cash for a “big 5” opportunity, you can erode your portfolio returns.

@rick thanks for that, i do use different metrics for established companies. i thought a bit about immature companies and came up with the above, maybe should be adjusted for share dilution. the thinking ,for me, and i have no research to back this up, but successful businesses will usually show promise relatively early so there will be some movement in the CFO and PBT lines, conversely wait until they do when there is significant derisking. i dont know Phil Town and its not my criteria but seems what he has seems reasonable. finally i thought the quote was " i wuold have written a shorter letter but got too lazy to stop" haha

@Solvetheriddle I also very much focus on Ops CF for immature companies as well and a positive trend indicating operating leverage. You expect investments and capital raises early on, but you want to see that these are driving op leverage. This has saved me a world of pain over the last 5 years, and especially the last 12 months.

Acquisitions can muddy the waters, so I am sure to track that they improve the operating leverage and don’t detract from it, after a grace period of 9-12m. That’s why firms that do serial, significant acquisitions are so problematic. It’s harder to get a fundamentals read on what’s going on.

Reminds me of the Howard Marks thing of - the wise person buys at the start and its the fool who is buying at the end. Me poorly paraphrasing but you get the idea

Hi @mikebrisy, I’ve been thinking about your comment “Isn’t the market efficient at finding and pricing the “big 5”?”

Perhaps not? I’ve looked at all Codan’s “Big 5” and used an online compound interest calculator to work out the compounding annualised growth for Revenue, Earnings, Equity and Cash Flow. https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php

Here are the results:

#1 ROE, on a general upward trend. Could flatten at around 25%.

Source: Commsec data

#2 Revenue Growth = 17.9% (75cps to $2.79cps)

#3 Earnings Growth = 35% (5cps to 56cps)

#4 Equity Growth = 14.7% (68cps to $2.03)

#5 Free Cash Flow Growth = 19.5% (7cps to 29cps)

Codan passes all “Big 5” with flying colours. If the market were using the “Big 5” and pricing Codan efficiently I don’t think the share price would be doing this:

I think the market is more influenced by the trend in the share price and how the rest of the market is reacting than anything else.

Cheers,

Rick

Disc: Codan held and accumulating IRL