Our methodology of evaluating and selecting stock market investment opportunities consists of two elements. Primarily, we perform a complete Financial Ratio Analysis to determine a company's overall financial health. The subtle point of Warren Buffet's statement, 'it is better to find a great company at a fair value, than a fair company at a great value' is often missed by investors who attempt to find undervalued companies regardless of their financial health. The Financial Ratio Analysis sets out to find the best suitable investment opportunities.

A strategic score is determined by the financial ratio analysis. The analysis is based on 4 segments: Liquidity, Debt, Profitability and Cash Flow ratios.

The second element is determining Economic Value Added, often referred to as economic profit. The EVA is the most successful performance metric used by investors. The EVA or economic profit represents the portion of capital surplus after a capital charge is subtracted.

Economic Value Added (EVA) is a better performance metric because it accounts for a capital charge against its capital returns. EVA measures pure economic profit. EVA is calculated by a finding company’s return on invested capital (ROIC) minus its WACC multiplied by the Invested Capital, (ROIC-WACC*IC). We use NOPAT (Net operating profits after adjustments for taxes) as the return metric which we divide by the Invested Capital

Economic profit can also be calculated in percentage form, usually expressed as a ‘return spread’. The return spread is simply the ROIC minus the WACC in percentage. When this return spread is positive, it means the company is generating surplus returns above the cost of capital and that translates into higher intrinsic Market Value Added (MVA) The MVA is defined as the company's current Market Cap minus its invested capital; Another inferred measurement of MVA is the present value of the discounted EVA. The MVA is then found by dividing the discounted EVA by the company’s WAAC less a constant growth rate. (MVA= EVA/WACC-Growth Rate). The fair base value of a company can be determined by first adding the MVA to the company’s Invested Capital and then dividing this total by its outstanding shares. (MVA+IC)/ Out Shares.

Until a business returns a profit that is greater than its cost of capital, it operates at a loss and it is said not to create wealth but to destroy it. Investors should look for positive return spreads, as well as companies that show consistent or growing spreads or EVA. Positive EVA is obtained when return on invested capital exceeds the cost of capital. Investors should look for return spreads greater than 3 times the current 10 years Risk-Free Government Bond Rate.

To define value, investors should distinguish between performance metrics and observational metrics. A performance metric refers to a measure of value under company control. An observational metric, also sometimes called a wealth metric, shows the Market's forward-looking, discounted opinion of company value. As an example, EPS is a performance metric and the P/E multiple its corresponding observational metric. The variables that determine EPS are affected by the company's decisions and actions. On the other hand, the P/E multiple is determined by the company's stock price based on the Market's opinion of implied value. Consequently a company may influence the P/E ratio but cannot fully control it.

The strategic score compiled for the company is based only on Performance metrics. Each individual element is counted, and the overall score is the result of the total value of all elements. A strategic score of 75% is preferred. The Return Spread requirement is 3 times the current risk-free Government 10 year bond rate. When both these two requirements are met, a company is assigned an 'A' rating and it is considered an investable company. Further analysis is required to find the optimal price entry point, based on ROIs, dividend, peer, book and growth values.

Company Rating is established by combining the Strategic Score and the Return Spread. Ratings can range from A to D, indicating Strong Buy, Potential Buy, Hold and Sell. Ratings are compiled on a quarterly basis following Company Quarterly results:

Higher than 75% Higher than 3 x Risk Free Rate A
Higher than 75% Less than 3 x Risk Free Rate B
Between 65% and 75% Higher than 3 x Risk Free Rate B
Between 65% and 75% Less than 3 x Risk Free Rate C
Between 45% and 65% Higher than 3 x Risk Free Rate C
Between 45% and 65% Less than 3 x Risk Free Rate D
Below 45% Any rate D