Value Tester App can be used to determine how well a certain stock ranks against Benjamin Grahams Value checklist.
Benjamin Grahams philosophy was to buy stocks that were trading at a discount to their Net Current Asset Value. This app implements a simplified version of Benjamin Grahams Investing checklist, consisting of following 6 checks:
1. Is stock price below 2/3 of Net Current Asset Value per Share (NCAVPS)?
2. Is current P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years?
3. Is total debt less than book value?
4. Is earnings-to-price yield at least twice the AAA bond rate?
5. Is current ratio greater than 2?
6. Is total debt less than 2 times Net Current Asset Value (NCAV)?
NCAV and NCAVPS Definitions:
Net Current Asset Value (NCAV) is calculated by taking a companys current assets and subtracting the total liabilities.
Net Current Asset Value Per Share (NCAVPS) is determined by dividing NCAV by the total number of shares outstanding.
Benjamin Graham created NCAVPS to determine if a company was trading at a fair market price.
According to Benjamin Graham, investors will benefit greatly if they invest in companies where the stock prices are no more than 67% of their NCAVPS.
However, Graham did make it clear that not all stocks chosen in this manner would have excessive returns, and that investors should also diversify their holdings when using this strategy.
E/P & AAA Yields Definitions:
Earning-to-Price Yield (which is the inverse of the P/E ratio) is an estimate of the interest rate that may be earned from holding a stock.
The AAA Corporate bond rate can be obtained from various financial websites.
The E/P Yield is compared to 10-yr AAA Corporate bond yield. If the E/P Yield is less than 2x the rate of the 10-year AAA corporate bond, the stock as a whole may be considered overvalued. If the E/P Yield is higher, the stock may be considered undervalued relative to the bond.
Book Value Definition:
Book Value is referred to Assets - Liabilities. Book Value can be calculated by multiplying BVPS (i.e. Book Value Per Share) of a company by number of outstanding shares.
Current Ratio Definition:
Current ratio is mainly used to provide an indication of the companys ability to pay back its short-term liabilities (debt and payables) thru its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.
Current Ratio = Current Assets / Current Liabilities
How Value Tester App works:
1. Enter NYSE or NASDAQ symbol and tap Start Test: the App examines the stock against Benjamin Grahams checklist.
2. For each of the 6 checks, a PASS is indicated with a green check mark, while a FAIL is indicated with a red X.
3. The overall score is based on the total # of check marks: 6 check marks = 100% (i.e. stock passed all 6 checks); no check marks = 0%.