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Moat Analysis

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  What is a Moat? The dictionary meaning of moat is a deep, broad ditch filled with water that surrounds a castle historically to provide a preliminary line of defense. It was like a ‘safety arrangement’ built around the castle in ancient times. Moat serves to protect those inside the fortress and their riches from outsiders. The wider and deeper the moat, more protected is the castle. It acts as an obstruction for the attackers to get access to the castle. How can Moat help us in stock investing? Assume that the company in which you are willing to invest is a castle. Prosperous castles are always subjected to attackers which try to take away the riches of the castle. Attackers here refer to the competitors which force the company to lower its margins and profits. Moat helps to protect the castle from the attackers. Moat here refers to the competitive advantage that helps the company to protect its margins and profits. Why is Moat necessary for a company? Moat is a characteristic t
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Valuation Ratios and Its Types

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  What are valuation ratios? Valuation ratios are financial metrics that helps to evaluate whether a company is overvalued or undervalued when compared to a certain measure, such as price and enterprise value. In other words, valuation ratios help to determine the cost of an investment with respect to the value or benefits of owing that investment.   Types of valuation ratios a) Earnings Per Share: It measures earnings of the company per outstanding share.   It indicates how much money a company earns for each share of its stock. A high EPS indicates greater value as investors will pay more if they think company has higher profits relative to its share price. Higher EPS is more desirable than low EPS as it means that the company is more profitable and has more profits to distribute to its shareholders.   b) Price/Earnings Ratio: It measures the current share price of a company relative to its Earnings Per Share (EPS). This ratio is used by investors to determine relative
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Porter's Five Forces

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What are Porter’s Five Force? Porter’s Five Force is a model that identifies and analyses  five competitive forces that shape every industry. The Five Forces model is named after Harvard Business School professor, Michael E. Porter. It helps analyzing the level of competition within a certain industry.  It also helps determine an industry's weaknesses and strengths. Porter's model can be applied to any segment of the economy to understand the level of competition within the industry and enhance a company's long-term profitability. The collective strength of these forces determines the profit potential of an industry and thus its attractiveness.   Understanding Porter’s Five Forces Porter's five forces include three forces from 'horizontal' competition – competition rivalry, the threat of new entrants and the threat of substitute products or services – and two others from 'vertical' competition – the bargaining power  of suppliers and the bargaining power
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Herfindahl-Hirschman Index (HHI)

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What is Herfindahl-Hirschman Index (HHI)? HHI is a score that helps to measure market concentration and used to determine market competitiveness. HHI is named after economists Orris C. Herfindahl and Albert O. Hirschman. It is an economic concept widely applied in competition and antitrust law. A highly concentration industry is the one where only a few players dominate the industry by holding a huge market share, leading to a near-monopolistic industry. Conversely, low degree of concentration refers to near-perfect competition scenario where many companies hold small market share.   Why is HHI important to an investor? HHI helps to measure market concentration which in turns helps us to determine profitability is the industry. There is a direct relation between market concentration and profitability. Low concentration perfect market and in perfect market there is cut-throat competition. So, it is difficult for the firm to earn above average returns. High concentration indicate
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Piotroski Score: Its Parameter and Interpretation

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  What is Piotroski Score? Piotroski score is a discrete score that helps investors to identify fundamentally strong companies by analyzing their financial statements. It is a number between 0 to 9 that reflects nine criteria used to determine strength of company’s financial position. It is used to determine the best value stocks, with nine being the best and zero being the worst.   Who was Piotroski? Piotroski, a professor of accounts as part of his understanding the valuation of stocks wanted to understand if fundamental analysis had a role in selecting stocks. He shortlisted stocks with which were in the top 20%. He used their balance sheets and income statements; he used metrics like quality of earnings, leverage, operating cash flow etc. Eventually, he shortlisted 9 parameters under the heads of profitability, leverage, and efficiency, which was called F-score or the Piotroski score.   Understanding the Nine Parameters of Piotroski Score? Profitability criteria includes: 1)Net Inc
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Solvency Ratio and Its Types

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When it comes to investing in a company, solvency is a crucial aspect. It is necessary to determine company's ability to pay its debt obligations. Read on for a breakdown of what solvency ratios are, why are they important, various types of profitability ratio, and how to calculate them. What is Solvency Ratio? Solvency ratios are also known as leverage ratios which  helps us examine a company’s financial health. It helps us in determining whether a company has sufficient cash flow to manage the debt obligations that are due. Do not mix solvency ratios with liquidity ratios. They are totally different. Liquidity ratios determine the capability of a business to manage its short-term liabilities while the solvency ratios are used to measure a company’s ability to pay long-term debts.   Why are solvency ratios important? All the funds required to run the business are not acquired from owners. Many businesses take debt in form of bonds, debentures, and loan. In long term, all
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Liquidity Ratio and Its Types

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When it comes to investing in a company, liquidity is a crucial aspect. Liquidity ratio is an essential tool to determine liquidity position of a company. Read on for a breakdown of what liquidity ratios are, why are they important, various types of profitability ratio, how to calculate them and how to interpret liquidity ratios.   What are liquidity ratios? Liquidity ratios is a type of financial used to determine a debtor's ability to pay off current debt obligations without raising external capital. It is used to determine a company’s ability to pay its short-term debt obligations. The metric helps determine if a company can use its current, or liquid, assets to cover its current liabilities.   Why are liquidity ratios important? The liquidity ratio is a great ratio that quickly gauges the current financial health and well-being of a company. It can also give us a reflection of how well a company’s administration is managing working capital. It affects the credibil
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