if you could only have four ratios to evaluate a company what would they be? This is a fun question that is popular in investing circles. For a laugh I’ll take my shot at it, what would you pick?
1) Current Ratio
Current Assets / Current Liabilities
Why?
This ratio keeps track of the company’s ability to pay its short term debt. If a company doesn’t have safety money to deal with debt then they might not be in business tomorrow and I don’t need any of that.
2) Dividend Yield
Annual Dividend Per Share / Price Per Share
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We made it to the final installment of our Graham vs. Greenblatt series. Throughout the series we examined each of the ratios that Greenblatt recommended in his book The Little Book that Beats the Market. The final posting will look at how Greenblatt draws the ratios together and bring this all back around, so lets get into it.
What is it?
Greenblatt says:
It then assigns a rank to those companies, from 1 to 3,500, based on their return on capital. The company whose business had the highest return on capital would be assigned a rank of 1, and the company with the lowest return on capital (probably a company actually losing money) would receive a rank of 3,500…
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Every day I pull a list of the insider traders then I shorten the list to be only buys done by roles that have a proven track record (see my previous post for a little on this). Finally I run an evaluation of the companies based on some of the ratios that Graham used to find companies that are cheap (See my earlier series on this).
This is just the start for me though after a company reaches this level it is worthy enough for me to look at it further not necessarily.
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 The ratios we have looked at so far tend to be a snapshot of the current condition of the company and don’t really explore a company’s history. Graham didn’t believe in investing in the next hot company, he was about buying companies with history and tangible revenues; companies where the paint on the sign out front is dry- basically boring companies. Graham also wanted a company that had proved that it understood its business and was on a path to continued success.
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