Investment Decisions: Criterions Summary

At the exposition of the different ratios for the fundamental analysis, absolute criterions are not used. The figures and percentages obtained are susceptible of variations depending on other ratios, exceptional situations at the market, attitude of the rest of the investors, etc. They distinguish themselves in favorable and unfavorable.

Favorable Criterions
Debt:

  • Shares of companies which debts are: not superior to their net value.
  • Own resources:
  • Shares that offer a profitability superior to the 15% of their own resources
  • Profitability of dividends:
  • Shares that offer dividends of, at least, two thirds of the profits obtained through assets without risks, as are the treasury bills:
  • Cash Flow:
  • Shares whose quotations are inferior to that of the cash flow that corresponds to them multiplied by six.
  • Shares whose price (cash flow ratio is inferior to the 30% of the average of the last years.
  • Relation between the price of the share and its accounting value:
  • Shares whose quotations are inferior to the two third of its accounting value.
  • Shares whose price/accounting value ratios are inferior in 30% to the average of the last five years.

PER

  • Per inferior to the 10%
  • Per inferior in a 30% to the average per of the last five years.
  • Per 40% inferior to the highest per of the last five years

Unfavorable Criterions
In general, you will reject the acquisition or maintenance of positions in shares pertinent to companies that:

Have losses in any of its last exercises

Their debts are superior to its net value (Debt ratio superior to 1)

Have more than two falls in its benefits in the last five years

Have had only two falls in its benefits along the last five years, but that these falls have been superior to 5% in relation to the former exercise.

Procedures I the Application of the Fundamental Analysis
We could resume the process to follow in the application of the fundamental analysis of the securities with the following steps:

Prediction about the global behavior of the economy. The investor must establish its criterions about the economic forecasting. Economic cycles, evolution of employment, inflation, type of interests, creation and closing company tips, industrial production indexes, etc.

Analysis of ratios of companies and economic sectors. Once determined the most favorable sector to invest in, and the companies considered as potential objectives for investment, the investor must analyze the ratios of the economic data of those companies. Once analyzed, he must compare the results with other ratios of companies of the same economic sector with other ratios of companies of the same economic sector and with the results of past exercises of the company in question, to have a global vision of its evolution.

Analysis of profits and dividends. This stage consists in examining the profits that the company has distributed along its last years and to do a prediction on which will be its evolution in the future. For it you may use the last data of the company.

Predictions based in the price/profit relation. The pretension is to try to estimate how the market is to pay for the expected growth of profits. The thing is to prognosticate the behavior of the market and not to limit in reinforcing the criterion of that who those analysis.

To determine the ideal model of valuation for the investments to do. There are many models to apply.

Furthermore than containing and analyzing all these information, the investor must ask himself day after day which are the securities that are being sold at a lower price than that the analyst said they should be.

For obtaining this kind of information you need of a daily and constant working at the analysis of the securities in the market, as also the reading of reports and the written opinions of the specialized press and of financial advisor.

Other advices make reference to the price of the securities and to the new that can affect the financial markets.

With respect to the price you may consider this as the key for investors to buy. The objective of the investors consists basically in buying a security at a lower price than its actual cost, and, naturally, expecting that in a near future the price will rise. The investigation of a security must be done thoroughly.

Too decide whether it is worth buying or not it musts be expressed in PER terms, expected income in comparison with the cost of the share and all the other ratios seen before.

With respect to the interpretation of the news. The global criterion consists in buying when there is bad news and to sell when they are good. This means that you would be done the opposite than the other investors. But one of the rules for winning consists in not doing what the majority does.

Another aspect to consider is the evaluation of the database. The future perspectives of a sector and of a security will always be determined by using a rigorous analysis of both. We can’t decide in investing only by basing our information on the market quotation due that it is of general knowledge.