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The Fundamental Score Indicator is an analysis technique created to analyze stocks strictly based on certain financial ratios of the company. The score ranges between 0 and 100, with a higher score signifying stronger fundamental data for a company and a lower score
signifying weaker fundamentals. The score takes into consideration eight different financial ratios that look into the liquidity, solvency, and profitability strength of a company.
To calculate the fundamental score, we first calculate several financial statement ratios. Each ratio is given a certain weight in order to calculate the total fundamental score. The default weights for each ratio are provided below in Figure 1. However, the weights are also inputs for the indicator, which will allow the client to place a higher or lower weighting to a certain ratio according to their preference. If you feel the Debt to Equity Ratio should have a higher weighting than the default 15%, you can adjust it higher and adjust another ratio lower. In order for the indicator to calculate accurately, all the ratio weights should add up to 100.
Quick Ratio 15% Debt To Equity Ratio 15% Operating Profit Margin 15% Return on Assets 5% Return on Equity 5% P/E Ratio 25% P/BV Ratio 10% EPS Growth 10% Total 100%
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In Figure 2 below is a table with a quick summary of all the financial ratios used in the fundamental score indicator. The table displays the formula, a quick description of the ratio and how it is used to analyze a company.
Ratio Calculation Description
[Cash + Marketable Securities + Receivables] _______________________________________
Used to determine liquidity strength of a company. The higher the ratio, the more likely the company will be able to pay current liabilities.
Debt To Equity Ratio
_____________ Total Equity
Solvency ratio used to determine the amount of leverage a company has or its use of debt financing. The lower the ratio, the better. Operating Profit Margin Operating Income ________________________ Total Revenue
Profitability ratio that measures the ability of a company to keep expenses low in order to retain as much of its revenue generated as profit. The higher the ratio, the better.
Return on Assets
Net Income _______________________
Average Total Assets
Profitability ratio that measures the ability of a company to use its assets efficiently in order to generate net income. The higher the ratio, the better.
Return on Equity
Net Income _______________________
Average Total Equity
Profitability ratio that measures the ability of a company to use its equity efficiently in order to generate net income. The higher the ratio, the better.
Price to Earnings Ratio
Valuation ratio that divides market price per share by earnings per share for the last 12 months. Used to determine if stock price is overvalued or undervalued. Price to Book Value
Tangible Book Value
Valuation ratio that divides market price per share by tangible book value. Used to determine if stock price is overvalued or undervalued.
EPS - EPS 1 Period Ago _____________________
EPS growth quarter over quarter. Used to determine recent growth of company.
The score for each ratio is based on a combination of the weighting assigned, as well as the result of the ratio and the difference between the current ratio and previous ratio. For example, for the quick ratio which measures the liquidity of a company, if the ratio is below 1, the score will be zero due to the fact that the company does not have enough current or liquid assets to cover its current liabilities. If the quick ratio is between 1 and 1.2, the score will be 25% of the quick ratio weight. If the quick ratio is between 1 and 1.2 and the current quick ratio is greater than the previous quarter’s quick ratio, the score will be 50% of the quick ratio weight. If both the current quick ratio and previous quarter’s quick ratio are above 1 and the current quick ratio is greater than the previous quick ratio, the score will be 75% of the weight. If the current quick
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ratio is greater than 1.2 and the previous quick ratio was greater than 1, then the score will be 100% of the weight. In general, for all of the ratios, higher scores are given if the ratio is either higher or lower, or if there has been a growth or decrease in the ratio between the current period and previous period, depending on the type of ratio it is. For the debt to equity ratio, the lower the better for the stock, versus the operating profit margin, where the higher the ratio, the better. The scoring criteria are customizable within the code. Once all of the individual scores have been calculated, they are all added together to form the final fundamental score, which will range between 0 and 100. If the ratio is 0, it signifies that there was no meaningful data to calculate the ratio.
There are several different inputs in the indicator that provide the client with more flexibility in the manner in which they use the indicator. The first eight inputs are the weights assigned to each financial ratio, which must add up to 100. “Ratios” provides the “client” with the ability to see the ratio for the current period if you leave the input as “true.” “Scores” provides the client with the ability to see the scores for each ratio for the current period if the input is “true.” If you type false instead, the ratios or scores will not display. The inputs “BullishScore” and “BearishScore” allow the client to identify what they would consider to be a strong fundamental score and a weak fundamental score.
Based on how you define the inputs “BullishScore” and “BearishScore,” the indicator will change color in a RadarScreen window to distinguish between a bullish and a bearish score. The last input, “QuartersAgo,” provides the client with the ability to view the fundamental score as of a certain number of quarters ago. This input helps the client see the progression of the fundamentals of a company through several periods. The input for “QuartersAgo” should always be a positive integer in order to calculate accurately. In Figure 3 below is a summary of all the Fundamental Score inputs, including the default input and a description of each input.
Name Default Description
Weight applied to the Quick Ratio of a company. The higher the ratio, the better.
Weight applied to the Debt to Equity Ratio of a company. The lower the ratio, the better.
Weight applied to the Operating Profit Margin of a company. The higher the ratio, the better.
Weight applied to the Return on Assets of a company. The higher the ratio, the better.
Weight applied to the Return on Equity of a company. The higher the ratio, the better.
Weight applied to the Earnings per Share of a company. The higher the ratio, the better.
Weight applied to the Price to Earnings Ratio of a company. The lower the ratio, the better given a positive P/E Ratio.
Weight applied to the Price to Book Value Ratio of a company. The lower the ratio, the better given a positive P/BV Ratio.
If the input is "TRUE," then the ratios will plot in RadarScreen. If the input is "FALSE," then the ratios will not plot.
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If the input is "TRUE," then the scores will plot in
RadarScreen. If the input is "FALSE," then the scores will not plot.
Score between 0 and 100 that defines a bullish fundamental score. Any score above this input will be defined as bullish.
Score between 0 and 100 that defines a bearish fundamental score. Any score below this input will be defined as bearish.
This allows you to see the historical fundamental score as of a certain number of quarters ago chosen. If input is defined as "1," then the indicator will plot the Fundamental Score as of 1 quarter ago.
The Fundamental Score Indicator should be used as a method of objectively analyzing and comparing the fundamentals of different companies. Using it in a RadarScreen® window allows you to compare stocks within the same sector to determine which stocks have stronger fundamentals versus others in the same industry. It was created to be used in a weekly interval, so make sure to adjust the interval in the
RadarScreen window to weekly. When the indicator is placed in a RadarScreen window with the default settings (Quarters Ago = 0; BullishScore = 60; BearishScore = 40), it is going to appear similar to Figure 4 displayed below. Return % will be 0 due to the fact that the input “Quarters Ago” is set to 0. Once the input “Quarters Ago” is greater than 0, it will compare the return on the stock as of the number of quarters ago specified in the input. This way, you can compare what the fundamental score was as of a certain number of quarters ago and then see what the return on the stock was as of that point in time.
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The first column displays the current Fundamental Score depending on the “QuartersAgo” input. If the input is left at 0, it will display the current score. If it is changed to 1, it will display the fundamental score as of one quarter ago. The second column will display the score as of one quarter ago, while the third column displays the score as of two quarters ago. The fourth column displays whether the signal is bullish, bearish, or flat depending on the inputs “BullishScore” and “BearishScore,” which the client can specify. The color gradient is also based on the inputs. Notice how the scores identified as bullish are blue, scores identified as flat are gray, and scores identified as bearish are red. The scores identified as flat are simply the scores that fall between the bullish score and the bearish score. In Figure 4, scores above 40 and below 60 are considered flat. The fifth column titled “Return %” will be used once the “QuartersAgo” input is greater than 0. It will then display the return as of the number of quarters ago the client specifies. The last column will display the input “QuartersAgo” in order for the client to identify the number of quarters ago the data is displaying. Accordingly, when the “QuartersAgo” input is 1 or greater, the second and third columns will be one period ago from the quarters ago specified. For example, if the input for “QuartersAgo” is 2, the 1-Ago column will display the fundamental score from three quarters ago, and the 2-Ago column will display the fundamental score from four quarters ago. Below in Figure 5 is an example of the indicator when using 1 as the input for “QuartersAgo.”
Notice how the “Return %” column and “Quarters Ago” column are now appearing in different colors based on the percent return of the stock as of one quarter ago. This feature allows the client to compare the
fundamental score of a certain number of periods ago to the return on the stock since that period. If the stock has had a high positive return during the period, the cell background changes to blue. Likewise, with a negative return the cell background is red, and with flat returns the background color is gray. Clients may
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want to use the indicator to look for stocks whose fundamental score has been rising from period to period or decreasing from period to period in order to look for stocks to go long or short. Clients may also want to take a contrarian approach and look for stocks whose fundamentals may be peaking or reaching a trough.
The Fundamental Score Indicator provides you with the ability to objectively rank equity securities based on several different financial ratios in order to compare stocks within the same industry or sector. The result of a stand-alone financial ratio is not always enough to accurately assess the financial standing of a company. The ability to compare the financial ratios of companies within the same industry or sector or to compare the changes between the financial ratios over time, is a more efficient way of analyzing the ratios. Keep in mind that a high fundamental score according to this indicator does not necessarily indicate a buying signal. It simply means that the current fundamentals of the company are strong; however, the market may have already priced this information into the security, meaning the stock could be overvalued. Some of the equities with current bearish signals and a lower fundamental score may be securities that are undervalued and with the most potential for future growth. You might want to instead use the indicator to look for growth in the fundamental score over several periods or simply as an additional filter to determine on which
securities you want to apply your own trading strategy. In addition, when plotting the ratios, you can sort by the eight different financial ratios that are being calculated to find the stock with the highest or lowest result in order to look for strength or weakness in a certain ratio. You may also apply the fundamental score
indicator in a scan to narrow down a list of stocks based on their fundamental score. Remember to adjust the interval to weekly when using the indicator.
In order to open the sample workspaces provided, you may first need to import the custom EasyLanguage® file with the extension .eld. Copy the attached .eld file and workspaces to your computer. Then import the indicators or strategies by double-clicking on the EasyLanguage .eld file. This will automatically start the TradeStation import wizard. Click ‘Next’ until the Analysis Techniques and/or strategies have been imported. The indicators are now available and you can now open the provided workspaces. Other supportive documents or files may also be attached to this email.
Alexandra Guevara is a Market Technician for TradeStation Securities
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