Creating the Risk/Reward Ratio in Stock Investor Pro 1) What is the Price-to-Book Value Multiple? Below 2.0 = 1 Between 2.0 and 3.0 = 2 Between 3.0 and 4.0 = 4 Above 4.0 = 5 SI Pro Custom Field Company must have a price-to-book-value ratio or it will not have a risk/reward score FC: P/Book Score IIF(IsFieldNull([Price/Book])=0,null,IIF([Price/Book]<2,1,IIF([Price/Book]<3,2,IIF([Price/Book]<4,4,5)))) 2) What is the P/E Multiple? Below 12 = 1 Between 12 and 20 = 2 Between 20 and 25 = 4 Over 25 = 5 SI Pro Custom Field We are using the forward P/E multiple which compares the price to the mean EPS estimate for the current fiscal year. Company must have positive estimate for a meaningful P/E ratio or it will not have a risk/reward score FC: P/E Score IIF(IsFieldNull([PE-Forward EPS Est Y0])=0,null,IIF([PE-Forward EPS Est Y0]<12,1,IIF([PE-Forward EPS Est Y0]<20,2,IIF([PE-Forward EPS Est Y0]<25,4,5)))) 3) Is Cash from Operating Activities Positive? Yes for the last five years = 1 Yes at least three (including the last reported fiscal year) of the last five years = 2 No for at least three (including the last reported fiscal year) of the last five years = 4 Not for most of the last 5 years = 5 SI Pro Custom Fields First custom field tabulates the number of years in cash from operations is positive. The second custom field measures the score based upon the number of years that operating cash flow has been positive. Higher emphasis is placed on positive cash from operation in the most recent fiscal year. FC: Years of Pos Cash Flow IIF([Cash from operations Y1]>0,1,0)+IIF([Cash from operations Y2]>0,1,0)+IIF([Cash from operations Y3]>0,1,0)+IIF([Cash from operations Y4]>0,1,0)+IIF([Cash from operations Y5]>0,1,0) FC: Cash Flow Score IIF([FC: Years of Pos Cash Flow]=5,1,IIF([Cash from operations Y1]>0,IIF([FC: Years of Pos Cash Flow]>2,2,4),IIF([FC: Years of Pos Cash Flow]=0,5,4))) 4) Are revenues, net income and EPS increasing? Yes for the last five years = 1 Yes at least three (including the last reported fiscal year) of last five years = 2 No for at least three (including the last reported fiscal year) of the last five years = 4 Not for most of the last 5 years = 5 SI Pro Custom Fields We are only using earnings per share for this scoring element. The first custom field tabulates the number of times earnings per share from continuing operations have increased from the prior year. The second custom field measures the score based upon the number of times earnings have increased from the prior year. FC: EPS Increases-Y6 to Y1 IIF([EPS-Diluted Continuing Y1]>[EPS-Diluted Continuing Y2],1,0) + IIF([EPS-Diluted Continuing Y2]>[EPS-Diluted Continuing Y3],1,0) + IIF([EPS-Diluted Continuing Y3]>[EPS-Diluted Continuing Y4],1,0) + IIF([EPS-Diluted Continuing Y4]>[EPS-Diluted Continuing Y5],1,0) + IIF([EPS-Diluted Continuing Y5]>[EPS-Diluted Continuing Y6],1,0) FC: EPS Annual Increases Score IIF([FC: EPS Increases-Y6 to Y1]=5,1,IIF([FC: EPS Increases-Y6 to Y1]>2,2,IIF([FC: EPS Increases-Y6 to Y1]>1,4,5))) 5) Have earnings estimates risen or fallen over the last 30 and 60 days? Earnings estimates for this year and next have risen = 1 Earnings estimates for this year and next are basically unchanged = 3 Earnings estimates for this year and next have fallen = 5 SI Pro Custom Fields We are only examining consensus EPS estimates for the current fiscal year and only how it has changed over the last 30 days. This custom field examines if the current estimate for the current fiscal year is higher, lower or equal to the estimate for the same reporting period one month ago. A company must have an estimate to obtain a risk/reward score. FC: EPS Est Revision Score IIF([EPS Est Y0]>[EPS Est Y0-Last month],1,IIF([EPS Est Y0]<[EPS Est Y0-Last month],5,IIF(IsFieldNull([EPS Est Y0])=0,null,3))) 6) What is the company’s current ratio? Above 1.0, but below 2.0 = 1 Above 2.0 = 3 Below 1.0 = 5 SI Pro Custom Fields Company must have a current ratio or it will not have a risk/reward score FC: Current Ratio Score IIF(IsFieldNull([Current ratio Q1])=0,null,IIF([Current ratio Q1]<1,5,IIF([Current ratio Q1]<2,1,3))) 7) What is the company’s debt/equity ratio? 50 or lower = 1 50 – 75 = 3 75 – 100 = 4 100 or higher = 5 SI Pro Custom Fields Company must have a debt/equity ratio or it will not have a risk/reward score FC: Debt/Equity Score IIF(IsFieldNull([LT Debt/equity Q1])=0,null,IIF([LT Debt/equity Q1]<50,1,IIF([LT Debt/equity Q1]<75,3, IIF([LT Debt/equity Q1]<100,4,5)))) 8) How does the company’s ROE compare to its peers? Better than its peers = 1 About the same as its peers = 3 Worse than its peers = 5 SI Pro Custom Fields While company to industry comparisons can be made in the screening editor, there is no provision for this in the custom field editor. We therefore are only comparing a firm’s ROE to all other firms tracked by Stock Investor Pro. A company must have a ROE ratio or it will not have a risk/reward score FC: ROE Score IIF(IsFieldNull([% Rank-Return on equity 12m])=0,null,IIF([% Rank-Return on equity 12m]<40,5,IIF([% Rank-Return on equity 12m]<60,3,1))) 9) Does the company sell products that fulfill needs, is it profitable and does it operate in a market with barriers to entry? Yes = 1 Yes to 2 of the 3 characteristics = 3 No = 5 SI Pro Qualitative test that is not measured in this scoring system 10) Does the stock add to your portfolio’s diversification? Yes = 1 No = 5 SI Pro Qualitative test that is not measured in this scoring system To calculate a stock’s risk/reward ratio just rate it according to each of the 10 questions, using the scale listed above and then add the total points for each stock. Total Points 10 – 14: Very good; the risk/reward ratio favors buying the stock 14 – 25: Good, the risk/reward ratio favors buying the stock, though the risks are higher 25 – 35: Average; the potential risks and rewards are about even 35 – 45: Bad; the risk/reward ratio favors selling the stock, despite the potential for reward 45 – 50: Very bad; the risk/reward ratio favors selling the stock SI Pro Custom Fields The eight scores are added together for the risk/reward score. FC: Rotblut Risk-Reward Score [FC: P/Book Score]+[FC: P/E Score]+[FC: Cash Flow Score]+[FC: EPS Annual Increases Score]+[FC: EPS Est Revision Score]+[FC: Current Ratio Score]+[FC: Debt/Equity Score]+[FC: ROE Score] Once these custom fields are entered, you can specify a maximum FC: Rotblut Risk-Reward Score in the screening editor.