Is it a good stock to buy?
You cannot read a financial paper or website without encountering an opinion about what constitutes an investable company. Likewise one-on-one conversations often morph into the same subject. For us it can be an occupational hazard. The question can be addressed with a question such as what are you looking for, what are your investment objects, what do own now or what time is it, I have to pick up the baby sitter.
Do your own scan. You will read words and phrases such as dividend yield, cash flow, price to book value, price earnings multiple and so on. More often than not though, a parameter is considered in isolation. However, our experience tells us that something as complex as a large corporation cannot be assessed by a standalone diagnostic.
By way of an analogy consider the various components that make up a larger more complex system such as a car. When the engine, transmission and drive train are functioning in unison, as designed, it is a wonderful ride. However, would you complain to your mechanic that you ran out of gas even though the speedometer reported the car was going 60.
Likewise for a large corporation, numerous components contribute to its success or failure. So any assessment of its health must be a multi-parametric analysis. For example, three indicators are how well the shareholder’s equity is being employed, how rapidly the earnings are growing, and how much capacity is there to survive in troubled times.
Taken together these factors paint a composite picture of a company, and how attractive its equity is to investors. No single factor determines a corporation’s health; that only becomes evident by gauging its parts.