Buffett Quality Score [Industry]The Buffett Quality Score is a composite indicator developed to assess the financial health and quality of companies operating within the Industrial sector. It combines a carefully selected set of financial ratios, each weighted with specific thresholds, to provide a comprehensive evaluation of company performance.
Selected Financial Ratios and Criteria:
1. Return on Assets (ROA) > 5%
ROA measures a company's profitability by evaluating how effectively it utilizes its assets. An ROA exceeding 5% earns 1 point.
2. Debt to Equity Ratio < 1.0
The Debt to Equity Ratio reflects a company's leverage. A ratio below 1.0 earns 1 point, indicating lower reliance on debt financing.
3. Interest Coverage Ratio > 3.0
The Interest Coverage Ratio assesses a company's ability to meet interest payments. A ratio above 3.0 earns 1 point, indicating strong financial health.
4. Gross Margin % > 25%
Gross Margin represents the profitability of sales after deducting production costs. A margin exceeding 25% earns 1 point, indicating better pricing power.
5. Current Ratio > 1.5
The Current Ratio evaluates a company's liquidity by comparing current assets to current liabilities. A ratio above 1.5 earns 1 point, indicating sufficient short-term liquidity.
6. EBITDA Margin % > 15%
EBITDA Margin measures operating profitability, excluding non-operating expenses. A margin exceeding 15% earns 1 point, indicating efficient operations.
7. Altman Z-Score > 2.0
The Altman Z-Score predicts bankruptcy risk based on profitability, leverage, liquidity, solvency, and activity. A score above 2.0 earns 1 point, indicating financial stability.
8. EPS Basic One-Year Growth % > 5%
EPS One-Year Growth reflects the percentage increase in earnings per share over the past year. Growth exceeding 5% earns 1 point, indicating positive earnings momentum.
9. Revenue One-Year Growth % > 5%
Revenue One-Year Growth represents the percentage increase in revenue over the past year. Growth exceeding 5% earns 1 point, indicating healthy sales growth.
10. Piotroski F-Score > 6
The Piotroski F-Score evaluates fundamental strength based on profitability, leverage, liquidity, and operating efficiency. A score above 6 earns 1 point, indicating strong fundamental performance.
Score Calculation Process:
Each company is evaluated against these criteria.
For every criterion met or exceeded, 1 point is assigned.
The total points accumulated determine the Buffett Quality Score out of a maximum of 10.
Interpretation of Scores:
0-4 Points: Indicates potential weaknesses across multiple financial areas.
5 Points: Suggests average performance based on the selected criteria.
6-10 Points: Signifies strong overall financial health and quality, meeting or exceeding most of the performance thresholds.
Research and Development:
The selection and weighting of these specific financial ratios underwent extensive research to ensure relevance and applicability to the Industrial sector. This scoring methodology aims to provide valuable insights for investors and analysts seeking to evaluate company quality and financial robustness within the Industrial landscape.
The information provided about the Buffett Quality Score is for educational purposes only. This document serves as an illustrative example of financial evaluation methodology and should not be construed as financial advice, investment recommendation, or a guarantee of future performance. Actual results may vary based on individual circumstances and specific factors affecting each company. We recommend consulting qualified professionals for personalized financial advice tailored to your individual situation.
