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Video: How to Determine a Company's Quality in 2 Minutes

Charlie Tian shows how easy it is to determine the quality of a stock using the rankings on GuruFocus.com

April 22, 2020 | About:

Hi fellow investors,

This is Charlie Tian of GuruFocus again. Today I want to show you how to find the quality of a company in about two minutes. This is very easy to do with the tools that we have developed here on GuruFocus.com.

The first company that I want to start with is Facebook (NASDAQ:FB). On the summary page of Facebook, there are two things you should look at to determine the quality of the company. The first thing that you want to look at is the financial strength.

In Facebook’s case, the rating is eight out of 10. This tells you the balance sheet strength of the company. You can also see that Facebook has a cash-to-debt ratio of more than five and interest coverage more than 100. This means that we can be certain of the strength of Facebook’s balance sheet.

The next thing to look at is the profitability rank, which is also out of 10. Facebook scores a nine, which is very high. This is awarded because it has a very good operating margin of 33% and the net margin is more than 26%. On average, a company would usually have an operating margin of around 8%, so Facebook has a very high margin and good growth as well.

Digging a little further into the page, you will find some financial charts. The income statement chart shows you two key components that are revenue and net income. You can see that Facebook has been growing its revenue very quickly and very consistently. Also looking at their cash relative to debt, Facebook has always been growing historically and until recently did not have any debt. These types of numbers allow us to be quite certain that Facebook is a high-quality company.

Now to look at another company, we will pull up Tesla (NASDAQ:TSLA). The summary page for Tesla shows up quite differently. Financial strength is only four out of 10 because the cash-to-debt ratio is less than one. This means that the company has more debt than it has cash.

The profitability rank is even lower at three out of 10. This means that Tesla has been rarely making money and it has actually been losing money most of the time. Tesla, therefore, is largely not a profitable company.

Further down, again looking at the charts, you can see that Tesla has been growing its revenue, but it has always been losing money as a company. You can also see that their debt has been increasing alongside the cash. However, the debt has always been greater than the cash.

These numbers show us that Tesla is not a very high-quality company. You can still make money from it, but there is a much higher level of risk due to their debt. Thanks to these types of rankings, finding the quality of a company is very simple and quick to do.

If you have any questions, please leave them in the comment section below and I will answer them as soon as possible.

Thank you for watching,

Charlie Tian

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About the author:

GuruFocus
Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 5.0/5 (1 vote)

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Comments

colby.holcomb
Colby.holcomb premium member - 2 months ago

no VOLUME... WTF. Fail

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