[ Money / Invest ] - ID: 35773 "Sorting terminal stocks from turnarounds: How can you tell the difference between a company getting into trouble, and one getting out of it? Its an important question for investors who try to buy shares on the cheap, when the price is low relative to the value of the companys assets or earning power [or low price to book ratio]. Typically, these companies are financially distressed. Profitability may be falling or negative and they may have to raise money just to keep going. They might not sound like good investments, but turnarounds can earn investors extreme returns when previously investors had written them off. Buy while business is still deteriorating, though, and at best youll have to wait before you make any money. At worst the company goes bust, and you loose everything. Why not reduce the waiting, and the risk? Ive been thinking about this question more actively since I lost money on SCS Upholstery, a turnaround that didnt. Checking a companys level of debt didnt save me from SCS fall. It had none. Perhaps a more complete description of a companys financial health would be a better test. The F-Score, invented by an academic, Joseph Piotroski, distinguishes between financially weak and financially strong companies. By selecting only the strongest companies from a pool of cheap stocks as measured by the price to book ratio, Piotroski increased average annual returns by 7.5%. Companies with low F-Scores are also five times more likely to go bust than companies with high scores. Intuitively, I like the F-Score because it combines common sense measures of financial healt Author's Info on Wikipedia Author on ebay Author on Amazon More Quotes by this Author Start Searching Amazon for Gifts [ Money / Invest ] - ID: 35773 "Sorting terminal stocks from turnarounds: How can you tell the difference between a company getting into trouble, and one getting out of it? Its an important question for investors who try to buy shares on the cheap, when the price is low relative to the value of the companys assets or earning power [or low price to book ratio]. Typically, these companies are financially distressed. Profitability may be falling or negative and they may have to raise money just to keep going. They might not sound like good investments, but turnarounds can earn investors extreme returns when previously investors had written them off. Buy while business is still deteriorating, though, and at best youll have to wait before you make any money. At worst the company goes bust, and you loose everything. Why not reduce the waiting, and the risk? Ive been thinking about this question more actively since I lost money on SCS Upholstery, a turnaround that didnt. Checking a companys level of debt didnt save me from SCS fall. It had none. Perhaps a more complete description of a companys financial health would be a better test. The F-Score, invented by an academic, Joseph Piotroski, distinguishes between financially weak and financially strong companies. By selecting only the strongest companies from a pool of cheap stocks as measured by the price to book ratio, Piotroski increased average annual returns by 7.5" TARGET="_top">Send as Free eCard