Confidence Index

This index represents the strength of your valuation. The index starts at 100 and is reduced for issues that weaken the reliability of the valuation results. These issues are:

1. Target companies that lack SEC-reported financial results. If this be the case, consider selecting a new target company. Even if the current target company has a bright future, it is not a value stock if you cannot accurately calculate it’s value. There are thousands of publicly-traded companies. Do not get hung up on just one target company. If you are unable to compute a high Confidence Index do not hesitate to revisit our Stock Screeners to locate a new potential target company. Learn how to find potential value stocks.

2. Comparables that are a poor match with the target company. You should select comparable companies that are as similar as possible to your target company. Learn how to find quality comparables.

You should strive to find valuations that result in a high Confidence Index (90 or greater). Any valuation with a Confidence Index below 90 should be closely examined, possibly selecting new comparable companies or a new target company.

Confidence Index Terms

Depreciation
Non-cash expense recorded for tax purposes.

Amortization
Non-cash expense recorded for tax purposes.

Capital Expenditures
Cash outlays made by the company that are “capitalized” over time.

Competitor
User-selected companies used to create a basket of comparable companies. Competitors should operate in a similar manner as the target company, offering the same service or products in the same geographical region with similar suppliers and channels of distribution.

Market Cap
Market Capitalization is the value placed onto a company by the market. Market Cap is calculated by multiplying the share price of the stock by the number of outstanding shares. The Market Cap for each company selected for comparison should be as close as possible to the target company.

Profit Margin
Net Income / Revenue. Measures the profitability of a company. The Profit Margin each company selected for comparison should be as close as possible to the target company.

ROE
Return on Equity. Net Income / Shareholder Equity. The amount of net income returned as a percentage of shareholders equity. The ROE for each company selected for comparison should be as close as possible to the target company.

ROA
Return on Assets. Net Income / Total Assets. An indicator of how profitable a company is relative to its total assets. The ROA for each company selected for comparison should be as close as possible to the target company.

CF
Cash Flow, also known as Operating Cash Flow (OCF). The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income.

Debt-to-Equity Ratio
Measures a company’s financial leverage by dividing Total Liabilities by Stockholders’ Equity. It indicates what proportion of equity and debt the company is using to finance its assets.

% of CF to Revenue
Measures what percentage of revenue is true cash flow.

EBITDA
Earnings before interest, taxes, depreciation and amortization. A good measure of the operating health of a company.