Since fundamental analysis is very time consuming and cumbersome task, we have developed a framework to derive easy to use ratings from the information reported by the companies. Eqax Ratings are a humble attempt to assist a fundamental investor with finding a suitable investment. Fundamental Analysis deals primarily with numbers but is still subjective to a certain extent.
Computer software works very well in this kind of domain. Our Ratings are exclusively generated by our proprietary software without any human intervention. These Ratings rely on crunching large amount of historical data and converting raw numbers in financial statements into ratings through algorithms developed by us. Following is the basic methodology behind them
Bottom up approach
Ideally a person should use the same method while buying anything, be it a mobile phone or a T-shirt or stocks. He should try to gauge the Quality of the entity and then see if Price he is paying is worth the Quality he is getting or not. Also he shouldn’t just come up with a gut-feel based rating of Quality and Price. He should sub-divide the Quality into various heads which will combine to give overall quality.
This is what our ratings are. We first consider individual ratios for example, debt-to-sales ratio, interest coverage ratio etc on both consolidated and standalone basis and then rate almost all companies on these parameters. Then we combine ratings into various heads. So, all parameters related to debt position of the company create a Debt Rating. Similarly, we create ratings for Size, Growth & Profitability in addition to the individual ratings of their constituents.
Combining these, we get a Quality Rating which tells us how good the company is. Parallel to this, we calculate a Price rating which deals with the valuations of the stock. Also we calculate the “Confidence Rating” which looks at criteria related to the credibility of the company. For example, a T Group company will have worse confidence rating than a similar B Group company or a company with no promoter, shares pledged will be better than a similar company with a lot of its shares pledged.
Combining these, we get the final EQAX Score of a company. So it is structured very much like a pyramid. There are bottom level ratings and there is a tier built on top of that and so on till we reach the final Rating. If we consider the whole pyramid, we create more than a 100 ratings for every company.