Please Help Me Understand How This is Computed

Serenity,

First of all, I want to say that I am not asking these questions to be difficult. I have found your site more useful than many other sites serving a similar purpose. At the same time, this site lacks sufficient training in its use. I have watched the brief video again and again. There should be a series of videos like this one explaining calmly and thoroughly how to make use of this profoundly useful material, but not very accessible to someone with little patience to try to figure it out. I have much patience and curiosity and I’m determined to understand both Benjamin Graham’s philosophy and also your program here that is proving so useful.

I am considering investing a large amount of money into Applied Materials Inc (AMAT). I want to understand how you reached your numbers below

#1. Current Assets ÷ [2 x Current Liabilities]: 114.75%
#2. Net Current Assets ÷ Long Term Debt: 122.19%
#3. [2 x Equity] ÷ Debt: 151.97%

Under the tab “Financial Condition” you provide the following:

Annual Sales: 14,608.00 Million
Current Assets: 10,206.00 Million
Total Assets: 19,024.00 Million
Current Liabilities: 4,447.00 Million
Long Term Debt: 4,713.00 Million
Total Liabilities: 10,810.00 Million
Shares Outstanding: 916.00 Million

1. For #1 above, I have successfully computed 10,206 ÷ [2 x 4,447] = 10,206 ÷8894 = 114.75%.

2. For #2 above, I cannot compute this. You provide “Current Assets” which I’m going to assume are the same as “Net Current Assets.” You also provide “Long Term Debt.” Therefore, 10,206 ÷ 4,713 = 216.55%. You have given a quotient of 122.19%. How did you compute this number?

3. For #3 above, I cannot compute this. Under “Financial Condition” you do not provide “Equity.” Is "Equity" the same as "Current Assets?" I’ve tried the number given for "Current Assets." It doesn’t come out to 151.97%. How did you compute this number?

Some questions:

1. If “Current Assets” are the same as “Net Current Assets” would you consider changing one or the other to have one standard and avoid confusion?

2. If “Equity” is different than “Current Assets” or “Net Current Assets,” would you consider adding “Equity” under your tab “Financial Condition” so users can compute these numbers to our satisfaction?

I appreciate your help and I hope you don't grow weary in answering my questions. I am your friend and if you make use of my questions and suggestions, you can improve upon an already excellent program that is needed by people like myself who value the wisdom of Benjamin Graham and others like him who are logical and careful investors. Thank you.

Dear Linus Christopher,

Thank you for your forum post and your valuable feedback!

Important: Diversification

I am considering investing a large amount of money into Applied Materials Inc (AMAT). I want to understand how you reached your numbers below

Before investing large sums of money, please first look into Graham's recommendations on Position Sizing and Debt : Equity distribution.

Responses to Email Queries

Free?

It appears that quite a bit of information is being made for free which is surprising to me as well. Are you doing this mostly as an act of goodwill because of your belief in the principles of careful investments?

The free features are made available for users to get comfortable with how Serenity works, before they invest in the paid screener. The differences between the free and paid features can be seen at Search vs Classic vs Advanced.

Screener Presets

Do you already have programmed into it some searches I can do without setting the criteria in each field myself? For example, can I simply run a search for every company that currently meets all criteria required by Benjamin Graham to be considered a "Defensive" investor? Also, I would like to then follow that up with a search for every company that meets Graham's definition of an "Enterprising Investor." I don't yet understand what Graham's "NCAV Criteria" means, but I'm sure I will figure it out as I go along. So, my question is this? Do I have to customize the filter combinations or can I leave that to you and your software to let me simply get a list of "approved" companies that meet all qualifications?

The Quick Reference already has the filter-preset links that you require (under Graham Grade), for opening both the free and paid screeners with Graham's standard filters set in advance.

The Quick Reference also has an explanation of all of Graham's grades, including the NCAV grade.

Graham Ratings

I was looking at AWK (American Water Works Company) and your algorithms have assigned it a rating of 4.5. Is the screener taking into consideration that AWK is a utility or is the mathematical algorithm treating all companies the same in assigning the rating number regardless of whether they are a utility or not? Thank you for this information. I have searched for the answer to my question, but was not able to find it. I am aware that with a utility the first four qualifications are not what matters, but the last two. My question only concerns whether the rating score of 4.5 has taken into consideration that AWK is a utility.

The Rating Score does consider all ratings. The score of 4.5 indicates that the stock clears four Defensive ratings (including one Utility rating), and one Enterprising rating.

Please note that the Rating Score was only introduced as way for users to quickly understand a stock's position, and has little little relevance to Graham's actual framework. Graham required specific combinations of these ratings such as the rating combination for Defensive stocks, which can be screened on the free Classic Graham Screener as follows.

Utilities

I encourage you to update your software so that utilities are treated differently in the computations than non-utilities. AWR is given a...

It would do well to further design the program to do separate computations for utilities and financials instead of giving an inaccurate rating.

The Rating Score is based on the actual number of Graham Ratings that a stock clears. American States Water Co (AWR) clears five Graham Ratings.

But you do have a legitimate point. The Rating Score can be misleading in this case, since AWR actually is an excellent stock; and clears all of Graham's qualitative Defensive ratings for Utilities.

Then again, as mentioned previously, the Rating Score was only introduced as way for users to quickly understand a stock's position, The Rating Score has little little relevance to Graham's actual framework.

Graham Grade

I encourage you to NOT use the "Graham Grade" as that makes the rating appear to be a grade rather than simply "the actual number of Graham Ratings that a stock clears." You have referred to it here as a "Rating Score." I think that is a great way to refer to it rather than a "grade."

Graham himself noted that Utilities were more likely to clear the Defensive criteria.

Utilities and Financials could not be included into the Graham grading system, because their specifications don’t necessarily apply to determinable sectors. They can sometimes apply to stocks that are not necessarily classified as Utilities or Financials, but they don’t apply to all stocks either.

The Graham grading system exists because not all of Graham's requirements are actually covered by the Graham Ratings. For example, the growth rule for Enterprising grade stocks and the earnings rule for NCAV stocks are not covered by the Graham Ratings.

So the Graham Ratings are more for getting a quick understanding and for customized screening, while the Graham grading system is actually a comprehensive Graham evaluation.

Fiscal Year

I'm researching Lam Research Corp (LRCX). I had the impression from your site that LRCX was in great financial condition. It has a rating of 7.5, lacking only a twenty-year dividend record. Everything is strong including the Net Current Assets ÷ Long Term Debt: 159.83%. Just beneath these numbers it says, "Updated on Saturday 16th May 2020."

The latest numbers I can find are from March 28, 2020, on a website called "Simply Wall Street" which shows that LRCX's debt is becoming a serious problem. The debt, as of March 28th, was 5.11 billion dollars, not the 3.87 billion shown under "Financials" on your site. Other trusted sites like Vanguard Fiduciary have the same number you do of 3.87 billion dollars. They refer to it as "Long-Term Debt." Vanguard acknowledges that their numbers are from June, 2019.

Serenity's screeners, as well as all individual stock pages, have information on:

a. When each stock was last updated.
b. Which Fiscal Year the data is for.

The Fiscal Year field for Lam Research Corp (LRCX) mentions 2019-06-30 under the Stock Data tab.

The Updated Date in this case possibly refers to the date when either the Previous Close or the TTM EPS was last updated.

Please note that Graham analyses are done almost exclusively with annual data.

All relevant information required to make an informed decision is presented on Serenity. But unfortunately, the subject is a complex one and the system may take a little bit of time and effort to figure out. Thank you for your patience!

Fair Value

How do you compute the fair value of a share of a company's stock? In my reading of "The Intelligent Investor," it appears to me that Graham said it could be done a few different ways.

1. One way was simply to multiply 1.5 times the current book value per share. I think he may also refer to this as 1.5 times the net asset value.

2. Another way he mentioned was to multiply the earnings per share (EPS) times 15. He said the stock price per share should be no more than the average earnings per share (EPS) of the last three years.

So far, so good. Both of those methods are fairly simple although the EPS for the past three years is sometimes difficult to find.

3. This third method is what confuses me. He said, "As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5." What the heck does that mean? What is the multiplier in this case?

The Multiplier here is simply another name for the P/E Ratio.

The 3 points you mention here constitute the basis for the derivation of the Graham Number, which is one of Graham's three Intrinsic Value calculations.

Standard Filters

How would you go about looking for U.S. companies that Benjamin Graham would invest in? He would be looking for companies that meet his expectations for size, assets, dividends, etc., but also are selling at significantly lower cost per share right now than they are worth. How do I find these companies using your Advanced Graham Screener? I have spent a lot of time trying to figure this out and it is not obvious how to do it.

The most accurate method of using Serenity's screeners is to use the screener-preset buttons in the Quick Reference.

Those buttons will open the screeners with Graham's standard filters set by default. One then only has to select one's exchanges.

Johannesburg and ZAc

Assore Ltd (ASR.JO)

Defensive Price-576.64?, Previous Close-31,950.00??

This is not unusual as Assore Ltd (ASR.JO) has the Stock Exchange set to Johannesburg and the Currency value set to ZAc.

The current exchange rate from the USD to South African Cents is about 1791.336.

EPS, BVPS and TTM

Which of these numbers are you using when computing the Defensive Price?

Under JP Morgan, under the tab "Per Share Values" you have the following EPS details.

Book Value Per Share (BVPS): 84.74
Tangible Book Value Per Share (TBVPS): 58.69
Earnings Per Share (EPS): 10.78
EPS - TTM: 8.86
EPS - 2 Years Ago: 8.92
EPS - 3 Years Ago: 6.83

When you compute the square root of 22.5 times the average of the last three earnings...

1. Which of these earnings are the last three?

2. What does EPS - TTM mean?

3. Do you use the book value per share or the tangible book value per share in the equation?

I understand the formula, the square root of (22.5 x average of last three earnings x book value per share), but as many ways as I've tried to plug in these numbers, I can't come up with 129.85 for the Defensive Price. Thank you for your help.

1. The Earnings Per Share (EPS) values used to calculate the average annual EPS for the Graham Number for all stocks on Serenity — including JPMorgan Chase & Co (JPM) — are:

a. Earnings Per Share (EPS)
b. EPS - 2 Years Ago
c. EPS - 3 Years Ago

2. EPS - TTM is a commonly used financial abbreviation for the trailing 12-month earnings per share (EPS).

3. The Graham Number is calculated using BVPS.

Graham Number = Square Root of (15 x 1.5 x EPS x BVPS)

Graham Number = Square Root of (22.5 x EPS x BVPS)

The intrinsic Value for Enterprising grade stocks is calculated using TBVPS as:

Serenity Number = Square Root of (10 x 1.2 x EPS x TBVPS)

Serenity Number = Square Root of (12 x EPS x TBVPS)

Responses to Forum Post Queries

Net Current Assets

2. You provide “Current Assets” which I’m going to assume are the same as “Net Current Assets.”

Net Current Assets is defined as Current Assets minus Current Liabilities. This is the generally accepted definition; and is also mentioned in Graham's own book, The Interpretation of Financial Statements.

Shareholder Equity

Is "Equity" the same as "Current Assets?"

The [2 x Equity] ÷ Debt rating on Serenity is simply a variation of of the standard Debt-To-Equity Ratio – D/E.

This Graham Rating is based on Graham's recommendations for "stock equity" or "stock capital" (also a common accounting term) in his instructions for selecting Financial and Utility stocks.

Equity ÷ Debt

2. If “Equity” is different than “Current Assets” or “Net Current Assets,” would you consider adding “Equity” under your tab “Financial Condition” so users can compute these numbers to our satisfaction?

The [2 x Equity] ÷ Debt rating is a derived value which is simply calculated as 2 x (Total Assets - Total Liabilities) ÷ Total Liabilities, as mentioned in the second comment in the link on Financial and Utility stocks.

Since it is a derivation based on existing values, and not a separate data-point, it has not been included in the individual stock pages.

Thank you!

Lastly, the Quick Reference link — and the links in its footnotes — should have most of the information you require to use Serenity's screeners.

Thank you once again for your valuable feedback, and your queries are welcome!

I am thoroughly impressed with the genius of this software program you are managing and likely created. I am equally impressed and grateful for the thoroughness and patience with which you have handled my inquiries. This program deserves to be promoted and used. At the same time, if it ever becomes really popular, the advantage to the few will be minimized as Graham explains in his books. Thank you so much!

Thank you for your kinds words, Linus Christopher!

Genuine Value Investing is unlikely to ever become very popular, and Buffett explained why nearly 4 decades ago.

"I’ve never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn’t seem to be a matter of IQ or academic training. It’s instant recognition, or it is nothing."

"The secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult."

Contemporary Value Investors such as Seth Klarman too have echoed these thoughts.

"While it might seem that anyone can be a value investor, the essential characteristics of this type of investor-patience, discipline, and risk aversion-may well be genetically determined. When you first learn of the value approach, it either resonates with you or it doesn't."

Seth Klarman, Preface (2008): Security Analysis by Benjamin Graham.

Graham Resources