Here is a short film on how we arrive at our Star-Ratings.
The Fundamental Analysis Score is an aggregate of the star-ratings for different sections of the Fundamental Analysis for a company.
In this example the company scores 88 for Fundamental Analysis and gets a score of 4-stars for Valuation Drivers.
1) Tab to the Fundamental Analysis section to understand how we derive our star-ratings.
2) Scroll down to Valuation Drivers and look at the graph of ROE vs P/E. If you think of the ROE as the Operating Advantage and the P/E as the Growth Advantage and plot the values of the two against each other you'll notice that XOM-US achieved a better operating performance than the median of its chosen peers and the market still expects faster growth from it than from those peers. All the companies in the top-right quadrant are classified by us as "Outperforming."
3) For our star-rating system we draw some imaginary lines through the graph. You can see them here in the form of dotted lines.
4) Companies that fall in the extreme top right like Exxon get 4-stars because they vastly outperform their peers both with regard to ROE and P/E. Companies in t extreme bottom left get a 0-star and are classified as challenged.
5) To put it differently, this chart shows the ROE vs P/E of a company relative to its peers. Companies are classified as Outperforming, Turnaround, Harvesting or Challanged based on which quadrant they fall on in this chart. Each quadrant is then further subdivided into four-sections which are each assigned a rating of 1 to 4 to determine the star-rating of the company for Drivers of Valuation.
6) Star-ratings for other attributes like Earnings Leverage, Sustainability of returns, Capital Investment Strategy etc. are computed in a similar fashion. The star-rating for Leverage & Liquidity assigns scores differently to each quadrant. All the star-ratings are then aggregated together to compute the overall Fundamental Analysis score of the company.
Note that the Fundamental Analysis score is generated relative to peers so it can change for a company depending on the peer set being used to generate the score.
- Default Peers: When you access a company score directly from our ticker or search feature you'll see Fundamental Analysis scores computed relative to the default peer set.
- Custom Peers: If you add custom peers to your peer set (link to custom peers) and click analyze new Fundamental Analysis scores relative to your peer set are dynamically generated.
- Switch Focus: This special feature allows you to Switch Focus from one company to another during your analysis and run the reports keeping the peer set of the original company. In this case the Fundamental Analysis score is being computed relative to the peer set of the original company.