Total assets minus total lia­bil­i­ties. What would be left over for share­hold­ers if the com­pa­ny sold every­thing and paid off all debts. Includes intan­gi­bles such as good­will.

Cof­fee shop anal­o­gy: if you pay $100,000 for a café with $110,000 in net assets, you could sell it for parts tomor­row and get your mon­ey back. If the assets are only $20,000, you’re tak­ing much more risk.

We want a com­pa­ny grow­ing its equi­ty every year — look back six half-year peri­ods and check that equi­ty increased in each one. This tells us how well man­age­ment has used its assets to grow the busi­ness.

For recent­ly list­ed com­pa­nies with only one bal­ance sheet entry in SD, leave this as blank.

A copy of the share price from Col­umn M, includ­ed pure­ly for easy ref­er­ence when cal­cu­lat­ing Net Equi­ty Per Share in Col­umn X.

How much of the com­pa­ny’s net equi­ty you’re get­ting for each share you buy. Some­times called “book val­ue per share”.

If we can buy $1.10 worth of equi­ty for $1.00, that’s a low-risk invest­ment. If we’re only get­ting $0.20 worth of equi­ty for $1.00, the risk is much high­er. This is as close to “buy­ing a dol­lar for fifty cents” as val­ue invest­ing gets.

What are we pay­ing per dol­lar of equi­ty? A ref­er­ence num­ber used in the next col­umn.

Ide­al­ly we pay no more than $1.33 for every $1.00 of equi­ty. That’s our safe­ty mar­gin. Any high­er, risk increas­es. This is the same lev­el War­ren Buf­fett has said he’d use to buy back Berk­shire Hath­away shares: 1.3× book val­ue.

How well the com­pa­ny is invest­ing its equi­ty. As a share­hold­er, EPS is your slice of the com­pa­ny’s prof­it.

We use EPS Before Abnor­mals. Abnor­mals are non-recur­ring items — e.g. major bad debt write-offs, acqui­si­tion expens­es, or cur­ren­cy move­ments — that would dis­tort the pic­ture of ongo­ing per­for­mance.

The ana­lyst con­sen­sus fore­cast for EPS in the next report­ing peri­od (next 6 months). Used for growth cal­cu­la­tions and the sec­ond intrin­sic val­ue.

If the com­pa­ny is too small to have ana­lyst cov­er­age, leave this blank — and leave Columns AD, AE, AI, AJ, and AK blank too.

Based on Peter Lynch’s PEG ratio. We want earn­ings to be grow­ing at a rate close to or exceed­ing the PE. If earn­ings are grow­ing fast, the effec­tive PE in future years falls — giv­ing us bet­ter val­ue than the cur­rent PE sug­gests.

If FEPS (Col­umn AC) is blank, leave this blank also.

We want com­pa­nies grow­ing faster than what is cur­rent­ly reflect­ed in their PE. A result above 1.5 is a strong sig­nal. A neg­a­tive result (earn­ings declin­ing) is penalised. Blank if FEPS is blank.

Stock Doc­tor’s Star Stock rat­ing is based on a deep analy­sis of busi­ness per­for­mance and out­look. A stock can hold up to two stars simul­ta­ne­ous­ly — add the scores. For exam­ple, Gold + Pur­ple = 1.5.

If you don’t have Stock Doc­tor, you can man­u­al­ly repli­cate the Star Stock rat­ing using Reuters “Key Met­rics” — see Episode 104 (16 min) and Episode 424 (52:44). Score these 7 met­rics 1 or 0, total as per­cent­age of 7:

• Quick ratio ≥ 1
• Cur­rent ratio ≥ 1
• Long-term debt to equi­ty 33%
• Total debt to equi­ty 33%
• Inter­est cov­er­age above indus­try aver­age
• ROE ≥ 15%
• EPS 5‑year growth rate: ris­ing

E.g. a 70% score = enter 0.7 in the check­list.

An inde­pen­dent val­u­a­tion of the stock, used as a cross-check against our own IV cal­cu­la­tions. Pre­fer the Lin­coln Val­u­a­tion (only avail­able for Star Stocks); oth­er­wise use the Con­sen­sus Val­u­a­tion.

If SD has no IV (com­mon for small stocks), leave blank.

If the pri­or cell (AM) was blank, leave this blank also. If the share price is above the Lin­coln IV but below the Con­sen­sus IV, it still scores 0 — Tony con­sid­ers the Lin­coln cal­cu­la­tion more accu­rate.

Look at the trend direc­tion of the Finan­cial Health rat­ing over the last two peri­ods. A recov­er­ing com­pa­ny (even if cur­rent­ly not in per­fect health) is scored high­er — it’s going in the right direc­tion. Sta­ble strong health = 1. Declin­ing = −1.

Note: on the SD bar graph, a low­er bar = stronger health (the y‑axis is invert­ed from what you might expect).

This is the cur­rent health rat­ing, not the trend. Read what it says in the big cir­cle in SD’s Finan­cial Health box. Strong or Sat­is­fac­to­ry both score 1. Any­thing else scores 0.

Buf­fett believes com­pa­nies where the founder remains involved as CEO or board mem­ber con­sis­tent­ly out­per­form oth­ers. The thresh­old is a ≥10% share­hold­ing.

This can be tricky when shares are held via a com­pa­ny. E.g. Solomon Lew holds 2.8% of Pre­mier Invest­ments direct­ly, but is Chair of Cen­tu­ry Plaza Invest­ments — the largest share­hold­er. A quick Google search usu­al­ly clar­i­fies the rela­tion­ship.

After being caught out by hid­den audit qual­i­fi­ca­tions in their finan­cial state­ments, Tony made this an imme­di­ate stop-check. If a com­pa­ny has any kind of mod­i­fied audit opin­ion, we don’t buy it — the risk of a sub­se­quent col­lapse is too high.

There are sev­er­al types of mod­i­fied opin­ion to watch for (from episode 426 with audi­tor James Oliv­er):

• Qual­i­fied opin­ion — “except for X, the accounts are fine.” Look for the words “except for”.
• Adverse opin­ion — the accounts are fun­da­men­tal­ly wrong, per­va­sive­ly.
• Dis­claimer of opin­ion — the audi­tor could­n’t get enough info to form an opin­ion.
• Empha­sis of Mat­ter — the audi­tor high­lights some­thing crit­i­cal (e.g. “mate­r­i­al uncer­tain­ty relat­ing to going con­cern”). This is also a red flag for us.

More detail: Episode 318 (intro) · Episode 426 (full dis­cus­sion with James Oliv­er) · Tran­script Ep 356