Graham’s Style

This scanner gives you a list of Indian stocks based on Benjamin Graham’s investing rules and strategy. Benjamin Graham, known as the “father of value investing,” was a pioneering economist and investor. His seminal work, “The Intelligent Investor,” advocates for analyzing a company’s intrinsic value and margin of safety before investing. Graham’s strategies focus on buying undervalued stocks with strong fundamentals, laying the foundation for modern investment practices followed by legends like Warren Buffett.

Let’s learn a little about his investing strategy.

According to Graham, there are some key areas to consider when searching for companies with growth and stable earnings, namely:

Market Capitalization

Benjamin Graham preferred large-cap companies because of their stable earnings and to avoid fluctuations in the company’s financials. For Indian companies, we’ll take the minimum market capitalization of 20,000 crores.

Current Ratio

It measures a company’s ability to cover its short-term liabilities with its short-term assets, calculated as Current Assets divided by Current Liabilities. The current ratio helps to gauge liquidity and financial health. Benjamin Graham preferred a Current Ratio between 1.5x and 3x, indicating that the company has adequate liquidity to meet its obligations without holding excessive assets that could be inefficient. Ratios below 1.5x suggest potential liquidity issues, while ratios above 3x might imply inefficiency in asset utilization.

Earning Per Share (EPS)

It measures a company’s profitability, calculated as net income divided by the number of outstanding shares. It’s a key indicator for investors, signaling a company’s financial health and growth potential. Benjamin Graham, a proponent of value investing, prefers the current EPS to exceed the previous year’s EPS, as it indicates consistent profit growth and financial stability. This trend helps you to identify robust companies likely to provide long-term value and withstand market fluctuations.

The Price-to-Earnings (P/E) ratio

It is a metric that evaluates a company’s current stock price in relation to its earnings per share (EPS) and indicates whether it is overvalued or undervalued. Companies whose P/E ratio is less than their industry P/E multiples can be considered undervalued and preferred by Benjamin Graham.

The price-to-book value (P/B) ratio

It is a crucial metric that evaluates a company’s current stock price in relation to its book value per share. A high P/B ratio may indicate an overpriced stock, while a low ratio could suggest an undervalued stock. Graham prefers the company’s that have a P/B ratio less than their industry multiples helps in providing a more accurate picture of the company’s value.

Debt/Current Assets

It is a financial ratio that compares a company’s total debt to its current assets. It indicates the proportion of a company’s current assets that would be needed to pay off its debt. A ratio below 1.10, as preferred by Benjamin Graham, indicates that a company’s debts are less than its liquid assets, suggesting strong liquidity and lower financial risk. This conservative metric helps you to identify companies that can comfortably cover their short-term obligations, reducing the likelihood of financial distress. Graham’s preference for a low ratio aligns with his value investing strategy, focusing on financial stability and minimizing potential investment losses.

In this scanner, we have made some modifications to the strategy, so that it can be seamlessly applied to Indian stocks.