If I Find a Company Like This, the Smart Money Score Will Reject It - Chart Of The Day 20 July 2018 - Equitymaster
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If I Find a Company Like This, the Smart Money Score Will Reject It
Jul 20, 2018


I've written to you about the tool I developed - Smart Money Score. It helps me to side step obvious and stupid mistakes.

Today, I thought I'll show you how it really works.

Every company recommended to Smart Money Secrets subscribers needs to pass this proprietary checklist.

I tested Sintex (pre-demerger). This is what I found.

The company failed horribly on almost all the metrics.

These eight indicators are very important to me. They broadly take care of all the important aspects I check before recommending any stock.

Each indicator has 10 points. But I assign higher weightage to Business Quality (ROEs, D/E, Cash Flows) and Corporate Governance (Earnings quality/ Management Integrity).

Just look at Sintex.

Promoters have been reducing their stake (they've issued FCCBs).

Over last five years, then average ROE was 12-13%.

It had a debt to equity ratio of above 1.

It does not stop here. The list is long.

The promoters have pledged their shares. They have misallocated capital time and again.

Thus, I got a rating of 3.25 out of 10 for Sintex.

And just to give you a perspective here... for any company to make the cut, it should have a rating of at least 6 out of 10.

I have never recommended a company with a score below 6-7. In fact, in most of cases it's more than 8.

It may be difficult to predict when an auditor will resign.

But it is relatively easy to know which stock you should avoid.

In fact, sometimes even research analysts fall for such stocks.

But the Smart Money Score plays a big role in keeping us away from such stories.

Happy Smart Investing!

Data Source: Ace Equity, Equitymaster's Smart Money Score

This Chart Of The Day was published in The 5 Minute WrapUp - Sintex's Auditor Resigns. How You Can Protect Yourself from Such Stocks

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