The STRIDE Blog

STRIDE Scores: Fundamental Analysis Made Easy

stride-scores-and-ratings-fundamental-analysis-made-easy-socialWe've had lots of questions about how STRIDE came to get its name and the nitty-gritty of what our scores mean for investors. As the two questions are linked, we thought we'd answer them together.

STRIDE is an acronym, blended together using the first letters of:

  • Strength
  • Timing
  • Returns
  • Intrinsic Value
  • Dividends
  • Earnings Predictability

This blend of terms not only gives our platform its name, it is illlustrative of what the STRIDE engine actually does.

Why STRIDE?

The words that contribute to make up the word STRIDE represent the most important elements in fundamental analysis for any value investor. Understanding any one of these elements alone will only give you a very narrow view of the health of any business. The more you add, the greater clarity with which you see the potential in an investment. Using all six will, in our opinion, give you the optimum view.

A business can appear strong right now but what if its economic moat is collapsing, effectively putting a strangehold on future growth? And how is a company paying its dividends? It may give back shareholders hefty annual rewards but for how long, if it is over-leveraging itself in order to do so?

We created STRIDE to show us what's really going on inside a business, reducing our exposure to risk and generating better returns.

All our scores are proprietary so please forgive us for not making them 100% transparent. We will, however, provide a clear overview of how they work. All scores are out of 100: the higher the score, the better. Once all scores are blended the engine assigns each business an overall STRIDE rating. Colours and descriptions add further clarity.

We do tend to use the terms 'score' and 'rating' interchangeably as well - simply because one will lend itself to a particular situation over the other. 

stride-scores-and-ratings-fundamental-analysis-made-easy-strengthStrength

STRIDE measures business strength by determining if it could ‘weather a storm’. How long could the company last in a tough economic environment, a sustained downturn or a change to its specific market?

Strength is a blended score that focuses on how each business performs within its sector. This is because the strength of a bank cannot be determined in the same way as a manufacturing or insurance company, for example.

Banks

We analyse capital and leverage ratios and ensure the bank is highly liquid. In measuring these ratios we aim well above current standards in the industry and we’ve already seen how prudent that choice was, given the state of the global banking system.

Insurance Companies

Again, capital and leverage ratios are very important, but here we also look at:

  • Insurance reserve to premiums underwritten

  • Current insurance liabilities to insurance reserves

  • Total insurance liabilities to insurance reserves

  • Reserve to liability ratios

  • Total reserve ratios

  • Solvency ratios

All other companies

For all other industries, we use a blend of:

  • Z scoring / Z” scoring

  • Liquidity ratios (Current / Quick / Cash)

  • Free cash flow generation

  • Operating cash flow generation

  • Working capital and retained earnings reserves

The exact blend is determined by the sector.

stride-scores-and-ratings-fundamental-analysis-made-easy-timingTiming

The STRIDE Timing score gives us a technical view of the current share price. While technicals generally do not come into value investing, we have found that using momentum to determine a good entry time into a great business can really boost overall returns.

We look at leading technical indicators to determine stength of the current share price and whether it is in an upward or downward trend.

Using simple moving averages and exponential moving averages over various periods combined with PPO, RSI and MACD indicators, the Timing score gives us a very good idea of future strength, trend and momentum.

stride-scores-and-ratings-fundamental-analysis-made-easy-returnsReturns

Businesses with a high Returns score generate top-end-of-the-scale returns on equity, assets and capital.

STRIDE also looks at whether a business is managing its debt obligations well. This rating ensures it can generate returns on any debt that will easily cover interest and capital repayments, while still generating a return for shareholders.

Calculating the Returns score is, again, industry specific. In general terms, STRIDE looks at:

• ROA
• ROE
• ROCE
ROCE after full “finance costs”

stride-scores-and-ratings-fundamental-analysis-made-easy-intrinsic-valueIntrinsic Value

The STRIDE Intrinsic Value score exists to give you a clear idea of the tangible assets in the business that you are buying.

It seeks the answer to one crucial question: Of the current share price, what portion of your investment is protected should the business be subjected to a ‘fire sale’ of its assets?

To answer this, and generate this score, we take total equity and strip out all intangibles, goodwill, minority interests, common stock issued in the current year and capitalised intellectual property. Put simply, the greater the value of assets remaining, the higher the score.

stride-scores-and-ratings-fundamental-analysis-made-easy-dividendsDividends

Our Dividends score reveals the full picture behind a dividend. While we appreciate businesses paying dividends to shareholders, they can easily become a primary focus at the cost of other aspects of the business. We want to make sure that dividends are well considered, consistent and sustainable, all things that this score shows. 

STRIDE ensures the dividend is:

  • Not going to affect the stability of the business

  • Easily financed from free cash flows

  • Consistent

  • Growing

  • Useful to us as investors in terms of yield

stride-scores-and-ratings-fundamental-analysis-made-easy-earnings-predictabilityEarnings Predictability

Earnings Predictability is STRIDE's score for growth potential. It focuses on how the business has fared over the past 5 years at growing all the cash generative / earning aspects of the business.

We look for businesses that have consistently grown:

  • Gross Profit

  • Net Income

  • Earnings Before Tax (but after Depreciation and

    Amortisation)

  • Free Cash Flow on both a full number and per share number basis.

Finding Scores References on STRIDE

For easy reference, we are placing links to this information in multiple places around the STRIDE platform and website.

Topics: STRIDE

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