BEFORE WE GOING TO DEEP DOWN INTO THE CONCEPT
LET US KNOW SOME BASIC
Here is all the data you can find by downloading the balance sheet of the company. after downloading the balance sheet find
Cash equivalent in the consolidated balance sheet,
DEBT: Total of noncurrent liability in consolidated balance sheet
EBIT in Consolidate statement of profit and loss.
You have to calculate
Market Capitalization = total share * current share price
Total share you can find equity share capital in the consolidated balance sheet
share price you can find on google
As an example I have highlighted all the required details, you can download this Asian paint financial statement from the below link
Now let us calculate the Earning yield
Cash equivalent=346.39cr
DEBT= 1214.61cr
EBIT =5158.65cr
Market Capitalization = total share * current share price
Total Share=95.92cr
Current Share price=2786.65
Market Capitalization =95.92cr*2786.65 =267295.46cr
Market Capitalization =267295.46cr
Earning Yield =EBIT/Market Capitalization + debt- Cash equivalent
Earning Yield= 5158.65cr/267295.46cr+1214.61cr-346.39cr=1.9236%
Earning Yield=1.9236%
HIGHER THE EARNINGS YIELD CHEAPER THE COMPANY AS VALUATION FOR YOU.
RETURN ON CAPITAL IDENTIFICATION OF GOOD COMPANY
NET fixed asset :Total non current asset in consolidate balance sheet
Current asset and current liability is higlighted in balance sheet downlord from below linked
Networking capital = Current asset - Current liability
we have
EBIT =5158.65cr
Current asset=12026.60cr
Current liability=5925.86
NET fixed asset :Total non current asset =8343.02cr
Networking capital=Current asset-Current liability
=12026.60cr - 5925.86cr = 6100.74cr
Networking capital= 6100.74cr
lets calculate the value of RETURN ON CAPITAL(ROC)
ROC = EBIT/NET fixed asset + Networking capital
=5158.65cr/8343.02cr + 6100.74cr
ROC = 35.78%
The higher the ROC is More efficient the company.
The quality of the business and operating model can be decided by ROC.
HIGHER THE ROC MEANS
1. SUPERIOR BRAND
2. LOYAL CUSTOMER BASE
3. EXCELLENT PRODUCE AND SERVICES
4. SUSTAINABLE BUSINESS MODEL
5. WIDE ECONOMIC MODEL
EARNING YIELD REPRESENTS THE INEXPENSIVE OF COMPANY VALUATION
Screener, value research, and equity master can be used to sort companies. Using the 9-Step Process, manually calculate the top 30 sort companies and always cross-check for more confidence and less error.
9 STEPS TO BUILD MAGIC STRATEGY
1. MARKET CAPITALISATION OF MORE THAN 5000 CRORE
This means you must go for large-cap companies and small-cap companies are not eligible for this strategy.
2. EXCLUDED SECTOR
Finance companies and utility companies are not eligible e for this strategy. As it uses a large amount of debt and is very much complex to understand for simple investing.
3. Excluded geography
ignore foreign company
4. EARNING YIELD
You have to calculate the earning yield and then rank it accordingly
5. RETURN ON CAPITAL
You have to calculate the RETURN ON CAPITAL and then rank it accordingly
THEN WE HAVE TO RANK IT BOTH BY ADDING RANK BOTH EARNING YIELD` AND ROC AS BELOW
6. NOW RANK THE STOCK ACCORDINGLY
7. INVEST THE MONEY IN RANKED SHARE
AFTER BACKTESTING WE FOUND IF YOU INVEST 20 -30 HIGHEST RAKED STOCK WITH EQUALLY 4% EACH.
8. ANNUAL REBALANCE
Sell the loser stocks in the 51st week from purchase so that short-term capital loss can be booked.
Sell the winner stocks in the 53rd week from purchase so that long-term capital gain.
It makes your taxes efficient but the magic rule required you to book profit once a year. which means you invest in the stock and after 1 year you book profit from profitable stock and get out from lose making stock. At the end of the year, you get either profit or loss like a business.
INVEST IN NEW RANK STOCK
every year you have to invest in the new ranking stock for that you have to calculate the process again.
It is just like farming
you select the seed, irrigate the crop, give time to grow then pick out the weed, cultivate the crop, and sell the crop for profit.
9. CONTINUE FOR 5 YEAR
Continue long-term for maximum benefit. as a business grows over time. It also grows well over a period of time.
8 years of backtesting report
The magical formula gives 14.9%
Bse Sensex gives 9.3%
18 years of backtesting reports (2002-2020)
The magical formula gives 35.4%
Nifty 50: 12.7%
with 4% equated amount in 25 stock
for clear understanding
if you have a lakh rupee invested in 2002 grown to 2.33 cr by 2020 with the magic formula strategy.
which is great for a strong mentality long-term investor. The psychology is very simple if you have invested in a market loss or win happen in the market it will definitely reward you in the long term if you keep money in the market. This means staying invested in this strategy will make you money.
Observation of 9 step
1. Include stocks with a market cap > 5000 cr
2. Exclude financial and utility stocks
3. Exclude foreign company
4. Calculate the company's earning yield
5. Calculate the company's Return on capital
6. Rank according to earning yield and ROC
7. invest in 20-30 highest ranked companies with equated 4% each.
8. Rebalance or sell all the stock annually Rebuy according to the rank.
9. Implement for long-term at least 5 years
you may find metal and mining stock are the high EY and ROC.
THINGS to AWARE
1. Cyclic Company
Cyclic company is those company with high volatility. These company prices change very fast. This is also known as a cyclic company.
if you want you can drop cyclic Company for investing.
2. Normalised Earning
means average earnings over a period of 5 years.
you can also tell as earning beyond sudden income and expenses.
as an example, if you are a job holder you have a salary that is your normalized income but when you get money selling land/big expenses and add/debit to your earnings that is not normalized earning when you exclude your earnings with that sudden earning and expenses that is called as normalized earning.
Always try to evaluate cash-rich companies independently due to their cash book EARNING yield can be wrongly calculated.
so never blindly trust the screener and do your own analysis every time ranking stock.
Always analysis
1. Business model
2. Finacial statement
3. Seasonality BUSSINESS
4. Promoter integrity
5. Company growth phase
You can get the READYmate tool for free
1. screener
2. Value research
3. Equity master
you can invest in this strategy if you are a job holder or a businessman you can easily invest in it requiring only one lakh investment.
Thank you for your time thank you.
waiting for your valuable comment.
.png)
.png)
.png)
0 Comments