Benjamin Graham is the man credited with founding the entire value investing field. When it comes to investing in shares of a company, only two simple factors are important to Benjamin Graham – The real value of the company and how much you are paying to own it. Value investing looks for good companies with low price. Here is a short summary of his investment criteria.
- Non-technology stocks.
- Large and prominent companies.
- Current ratio of minimum 2
- Long term debt less than net current assets
- Long-term EPS growth of 30% or more and no negative annual EPS in last five years
- P/E (Price-Earning) ratio of less than 15
- The product of P/E ratio and P/BV (Price to Book Value) ratio less than 22
- Total debt-equity ratio of not more than 100%
- Company had been paying dividend every year during the past twenty years
To decide if a company is large and prominent, look at the sector or industry the company is in, and its sales and be sure their sales are sufficiently high.
Low current ratio may indicate the low liquidity and short term financial trouble for the company. But a high current ratio may also indicate a problem within the company. For utilities and telecom companies, he allows current ratio of less than 2.
Long-term EPS is calculated based on the average EPS of last three years and average of EPS of first three years of last 10-year period.
For the calculation of P/E ratio, he considered average EPS of last three years.
For the P/BV, it is total assets minus intangible assets minus liabilities.
For debt-equity ratio, it is short and long term debts excluding other liabilities. For utilities and telecom companies, he allows more debts up to ratio of 230%.
These days, followers of his investment principles do not give much emphasis on the criteria of dividend payment as companies may re-invest their earnings for its growth instead of paying dividend.