Extracts fm Chapter 14 - Stock Selection for the Defensive Investor

C R I T E R I A S

1. Adequate Size of Enterprise
The idea is to exclude small companies whihc may be subject to more than average vicissitudes especially in the industrial field. Not less than $100Mil annual sales for an industrial company and not less than $50Mil of total assets for a public utility.

2. A Sufficient Strong Financial Condition
For industrial companies current assts should be at least twice current liabilities - a so-called two-to-one current ratio. Also, long term debt should not exceed the net current assets (or working capital). For public utilities the debt should not exceed twice the stock equity (at book value).

3. Earnings Stability
Some earnings for the common stock in each of the past ten years.

4. Dividend Record
Uninterrupted payments for at least the past 20 years.

5. Earnings Growth
A minimum of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

6. Moderate Price/earning Ratio
Current price should not be more than 15 times average earnings of the past three years.

7. Moderate Ratio of Price to Assets
Current price should not br more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1.5 times book value. It would admit an issue selling at only 9 times earnings ans 2.5 times asset value, etc.)

My Comments - As the book was last updated by Graham in 1970's, the commentary by Jason Zweig provided an update on figures more relevant to the present. Please read the book :D