Score Cards Explained

What are Score Cards?

Score Cards are an experiment! The idea is to provide all of the most relevant financial data for a growth stock in a quick overview and to compute an automatic Score based on this data. Our theory is that stocks with a high score (8 or higher) will outperform, and those with a low score (0 or lower) will underperform.

IMPORTANT: The Score is automatically generated, no human input is involved. The Score Cards incl. Score are designed to be a starting point for your own research, not to replace it. There are many decisive factors for the valuation of a growth stock that can not and are not reflected in the Score Cards. There can be company-specific reasons why a stock with a very high score is traing at a very low price.

Investing in microcaps, sub-$5 stocks, OTC/BB or Pink Sheets stocks, generally small capitalized stocks without significant institutional backing and especially also U.S.-listed China small caps always comes with a high degree of risk! You should NEVER invest in a stock based on the Score Cards alone, and if you get interested in a stock with a high Score you must dig deeper into the story yourself, look out for other sources, read the company's SEC filings and look at metrics as liquidity and ownership.

The Score is automatically generated and should not be seen as a recommendation to buy or sell a security. The ratings (Buy, Hold, Sell) that were posted next to the Score have been removed as they were more confusing than helpful. Score numbers should be evaluated in combination with our safety/risk indicators, that are being rolled out now for all the stocks we cover. As the Score is based on reported SEC financials, a major risk would be that those financials are incorrect, leading to an artificially high Score. The label "UNDER REVIEW" is added to the Score if the company is delinquent with its SEC filings, if the company has been accused of fraud by a credible source, or if trading in the stock is halted.

How is the Score Generated?

Updated: April 22, 2011

The score is based almost entirely on the past performance of the stock. It uses financial data from the most recent two reported quarters, where the always last one is listed on the Score Card under Last Quarter. Projected future performance, company guidance or analyst estimates do not go into the score, although - if available - a future earnings projection is added to the Score Card.

Shares Outstanding: The current fully diluted share count is taken from the always latest quarterly filing, but please note that at the time you are reading this there might be more shares outstanding through secondary offerings, convertible notes, warrants and other dilutive events.

- POSITIVE: less than 30 million shares outstanding (1 Point added)
- NEUTRAL: 30 - 50 million shares outstanding
- NEGATIVE: more than 50 million shares outstanding (1 Point deducted)

New Shares / Dilution: The increase of fully diluted shares outstanding in the past 12 months. Data taken from the always latest quarterly filing. Dilution percentage based on share count in the previous year and current FD share count (see above). Heavy shareholder dilution has been one of the most serious problems for China small caps investors in the past.

- POSITIVE: under 10% dilution (1 Point added)
- NEUTRAL: 10% - 30% dilution
- NEGATIVE: over 30% dilution (1 Point deducted)

Cash: Cash and cash equivalents, excl. restricted cash, according to the most recent quarterly or annual filing available. A high cash position might indicate that the company can fund future growth without near-term dilution of shareholders. A low cash position increases the risk that the company is tempted to use a rise in share price to sell new shares right away.

- POSITIVE: more than 30% of current market capitalization (1 Point added)
- NEUTRAL: between 10% and 30% of current market capitalization
- NEGATIVE: less than 10% of current market capitalization (1 Point deducted)

Account Receivables: Account (or trade) receivables according to the most recent quarterly or annual filing available. Account receivables are an important factor, as with a high ratio the company might be forced to take on debt to finance those unpaid bills even if it is net profitable. Certain industries have traditionally higher account receivables than others.

- POSITIVE: less than 10% of current market capitalization (1 Point added)
- NEUTRAL: between 10% and 30% of current market capitalization
- NEGATIVE: more than 30% of current market capitalization (1 Point deducted)

Account Receivables (Trend): Quarterly increase/decrease of account (or trade) receivables according to the most recent quarterly or annual filing available. The trend only matters for the score cards if total account/trade receivables in the most recent quarter count for more than 10% of the company's market capitalization.

- POSITIVE: quarterly decrease (1 Point added)
- NEGATIVE: quarterly increase of at least 20% (1 Point deducted)

Long-Term Debt: Long-term debt, excl. warrant liabilities, according to the most recent quarterly or annual filing available. All debt has to be paid back at some point, and quite often this happens with new shares.

- POSITIVE: less than 5% of current market capitalization (1 Point added)
- NEUTRAL: between 5% and 20% of current market capitalization
- NEGATIVE: more than 20% of current market capitalization (1 Point deducted)

Revenue Growth: Year-over-year revenue growth for the most recent quarter, as filed with the SEC. Quarter-over-quarter (sequential) revenue growth is only listed for informational purpose and does not count for the Score. Companies in certain industries have a highly seasonal business where sequential growth does not matter for valuation of the company.

- POSITIVE: revenue growth of at least 30% (1 Point added)
- NEUTRAL: revenue growth between 0% and 30%
- NEGATIVE: negative revenue growth (1 Point deducted)

Net Income Growth: Year-over-year net income growth for the most recent quarter, as filed with the SEC. Quarter-over-quarter (sequential) nezt income growth is only listed for informational purpose and does not count for the Score. Companies in certain industries have a highly seasonal business where sequential growth does not matter for valuation of the company.

- POSITIVE: return to profitability, net income in the year-ago period was negative (2 Points added)
- POSITIVE: net income growth of more than 50% (2 Points added)
- POSITIVE: net income growth between 20% and 50% (1 Point added)
- NEUTRAL: net income growth between 0% and 20%
- NEGATIVE: negative net income growth (1 Point deducted)

EPS Growth: Year-over-year earnings-per-share growth for the most recent quarter, using the always most recent share count and not the average fully diluted share count in the most recent quarter. Our number is therefore usually more conservative than the EPS number reported on the income statement. Within the growth metrics, EPS growth has the highest weight for the Score as this is what matters most for shareholders.

- POSITIVE: EPS growth of more than 50% (3 Points added)
- POSITIVE: return to profitability, net income in the year-ago period was negative (2 Points added)
- POSITIVE: EPS growth between 30% and 50% (2 Points added)
- POSITIVE: EPS growth between 10% and 30% (1 Point added)
- NEUTRAL: net income growth between 0% and 10%
- NEGATIVE: negative EPS growth (1 Point deducted)

Price/Earnings Ratio: For the Score Cards we annualize net income from the always last two quarters. This is not an ideal method but in many cases it gives a more accurate picture of short-term developments and accelerating growth than using trailing twelve months earnings. Again, our numbers are conservative as we use the always last reported fully diluted share count and not an average over the reported period. We consider P/E Ratio the most important factor in valuation, therefore it has an extra weight for the Score.

- POSITIVE: P/E ratio < 6 (3 Points added)
- POSITIVE: P/E ratio < 8 and > 6 (2 Points added)
- POSITIVE: P/E ratio < 10 and > 8 (1 Point added)
- NEUTRAL: P/E ratio < 12 and > 10
- NEGATIVE: P/E ratio > 12 (1 Point deducted)
- NEGATIVE: negative P/E ratio, company is loss-making (2 Points deducted)

Price/Cash Flow Ratio: The ratio of price to operating cash flow per share. Cash flow numbers are annualized using the reported results from the always last two quarters that were filed with the SEC. Ignored by many investors, cash flow is many times a better way to measure a business's profits than earnings. Positive net income alone can not pay any bills, it is cash generated from the operations of a company that does. Depending on the seasonality of the industry there can be large quarterly volatility in reported cash flow. Operating cash flow data is not available for all stocks on the China Tracker.

- POSITIVE: P/CF ratio < 6 (2 Points added)
- POSITIVE: P/CF ratio < 10 and > 6 (1 Point added)
- NEUTRAL: P/CF ratio < 15 and > 10
- NEGATIVE: P/CF ratio > 15 (1 Point deducted)
- NEGATIVE: negative operating cash flow (2 Points deducted)

Price/Sales Ratio: As with earnings, our sales numbers are annualized from the always last reported two quarters. The importance of a price to sales ratio varies from industry to industry.

- POSITIVE: P/S ratio < 1.25 (1 Point added)
- NEUTRAL: P/S ratio between 1.25 and 2.50
- NEGATIVE: P/S ratio > 2.50 (1 Point deducted)

Price/Book Ratio: The current share price in relation to Book Value per share. We are using Total Stockholders' Equity from the balance sheet of the always last reported quarter (SEC filing).

- POSITIVE: P/B ratio < 1.25 (1 Point added)
- NEUTRAL: P/B ratio between 1.25 and 2.50
- NEGATIVE: P/B ratio > 2.50 (1 Point deducted)

Recent Price: We are recording recent highs and recent lows for all stocks on the China Tracker. A stock that is trading near its highs is short-term more attractive than one that is trading close to its lows. We believe that for value investors it is recommended to buy a stock in an uptrend and more risky to start a position near a stock's lows.

- POSITIVE: current price within 20% of recent high (1 Point added)
- NEGATIVE: current price within 20% of recent low (1 Point deducted)

Forward Estimates: We are using official company guidance, analyst estimates, and our own research to project earnings per share for the current/next fiscal year. The Trading China forward EPS estimate is usually a mix of all three sources. We are trying to be conservative with our projections and the EPS number posted here might be lower than what you will find elsewhere. Forward estimates are not always comparable as many companies have irregular fiscal years. This is always a speculative number and there can be no guarantee that the actual results will match the estimates posted here or elsewhere. Forward estimates are not available for all the stocks on the China Tracker.

- POSITIVE: Forward P/E ratio < 4 (3 Points added)
- POSITIVE: Forward P/E ratio < 6 and > 4 (2 Points added)
- POSITIVE: Forward P/E ratio < 8 and > 6 (1 Point added)
- NEUTRAL: Forward P/E ratio < 10 and > 8
- NEGATIVE: Forward P/E ratio < 15 and > 10 (1 Point deducted)
- NEGATIVE: Forward P/E ratio > 15 or negative (2 Points deducted)

Auditor: The quality of the public accounting firm is a factor that has become increasingly important for the credibility of a U.S.-listed Chinese company and for gaining the trust of international investors. We acknowledge that for start-up and small capitalized companies auditing fees have to be contained at a reasonable level. However, any company that has grown out of its early stage should consider hiring one of the Big Four auditors (KPMG, Ernst & Young, PricewaterhouseCoopers, Deloitte) or at least a Top 10 firm, and points are taken off the Score if a company sticks with small or even no-name auditors.

- POSITIVE: Big Four Auditor (2 Points added)
- POSITIVE: Top 10 Auditor and Market Capitalization under $200 million (1 Point added)
- NEGATIVE: Mid-size Auditor (Rank 11-100) and Market Capitalization over $200 million (1 Point deducted)
- NEGATIVE: Unranked Auditor and Market Capitalization under $200 million (1 Point deducted)
- NEGATIVE: Unranked Auditor and Market Capitalization over $200 million (2 Points deducted)