ruly Value: 10 criteria to analyze a stock trading at a discount
A preset strategy to analyze a company priced low against its earnings and assets: each criterion explained, where the thresholds come from, and the risk of a value trap.
Published
A preset strategy, read-only: duplicate it to adapt it. The thresholds are common benchmarks, not rules, and a strategy verdict never tells you what to do with a stock.
The criteria and their thresholds
| Criterion | Criterion met | To monitor | Criterion not met |
|---|---|---|---|
| P/E ratio | 0 to 12 | 12 to 18 | > 18 or < 0 |
| Price / book value | ≤ 1.5 | 1.5 to 2.5 | > 2.5 |
| P/E × price / book value (calculated) | 0 to 22.5 | 22.5 to 30 | > 30 or < 0 |
| Enterprise value / EBIT | ≤ 10 | 10 to 14 | > 14 |
| FCF yield | ≥ 7% | 4% to 7% | < 4% |
| Margin of safety (against the fair value entered) (calculated) | ≥ 30% | 15% to 30% | < 15% |
| Current ratio | ≥ 1.5 | 1 to 1.5 | < 1 |
| Net debt / EBITDA | ≤ 2 | 2 to 3 | > 3 |
| Financial strength score (out of 9) | ≥ 7 | 5 to 7 | < 5 |
| Catalyst and value trap risk | Not scored | ||
Thresholds read from the preset strategy in the app. A calculated criterion is worked out by the app from two figures you enter.
Who it is for
This strategy is for investors looking for companies whose share price is low against their earnings, their cash flow or their assets. It is the “value” style of the factor families: paying little for what the company produces or owns, and keeping a margin for error.
It takes more work than the others: a discount often has a reason. The strategy therefore pairs valuation ratios with soundness criteria, and ends with an open question about the risk of a trap.
The 10 criteria, one by one
P/E ratio
The P/E ratio divides the share price by earnings per share. Up to 12, the company is priced at less than twelve years of current earnings, well below the long-run average of major markets. Above 18, the valuation already assumes growth that this strategy is not looking for.
Price / book value
It compares the share price with the book value of equity per share. Up to 1.5, the investor pays little beyond what the balance sheet shows. This ratio is most telling for companies with tangible assets: industry, banks, insurers.
P/E × price / book value
The product of the two previous ratios, which the app works out from the two values you enter. The 22.5 threshold comes from Benjamin Graham’s “The Intelligent Investor”, where it is obtained by multiplying a P/E of 15 by a price / book of 1.5. The point of this product: it tolerates a slightly higher P/E when the assets are very cheap, and the reverse.
Enterprise value / EBIT
The P/E ignores debt. EV / EBIT takes it into account: it divides market capitalization plus net debt by operating profit. Up to 10, the whole company, debt included, costs less than ten years of operating profit.
FCF yield
Free cash flow divided by market capitalization. At 7% or more, the company generates in cash each year a large share of its stock market value. It is the inverse of a price / FCF multiple of about 14.
Margin of safety
You enter your own estimate of the fair value per share in the sheet header, using the method of your choice, and the share price in this criterion. The app calculates the gap. With a gap of 30% or more, your estimate can be clearly wrong without the analysis falling apart. See the margin of safety entry and the margin of safety calculator.
Current ratio
Current assets divided by current liabilities. At 1.5 or more, the company can meet the year’s obligations without new financing. Below 1, it depends on its banks or its suppliers.
Net debt / EBITDA
A company that is both discounted and indebted is fragile: if its results fall further, debt can take over. Green stops at 2, red starts above 3.
Financial strength score
A 9-point score, published in 2000 by Joseph Piotroski, which tests profitability, leverage, liquidity and efficiency by comparing the last two financial years. It helps separate discounted companies that are improving from those that are deteriorating. Green starts at 7, red at 4 or less. See the financial strength score entry.
Catalyst and value trap risk
A text criterion, never scored. You write down what could bring the share price closer to your estimated value, and what would turn the discount into a trap: declining business, sector in crisis, hidden debt. See the value trap entry.
Why these thresholds
The P/E and price / book thresholds follow the spirit of the defensive investor criteria described by Benjamin Graham, adjusted to today’s valuation levels. FCF yield, EV / EBIT and the financial strength score come from more recent work, widely used by data providers.
You can adjust them to your market in a copy of the strategy. In a market where the average P/E is around 20, a green threshold at 12 lets very few companies through. That is intentional, but you can widen it.
Limits
A low share price can stay low for a long time, or fall further. Valuation ratios rest on past earnings, which may not recur: a cyclical company at the top of its cycle shows a flattering P/E just before its results decline.
Companies whose value lies mainly in intangible assets (software, brands, patents) always look expensive on price / book. For banks and insurers, EV / EBIT, the current ratio and net debt / EBITDA make no sense: tick “Not applicable”.
Each criterion’s verdict is an aid to thinking. The decision remains yours.
The indicators in this strategy
Sources
- Benjamin Graham, “The Intelligent Investor” (criteria for the defensive investor)
- Joseph Piotroski, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers”, Journal of Accounting Research, 2000
- MSCI, factor families (value, quality, yield, growth)
- Annual reports of listed companies