DOCSEARCHbyAlgolia
Submit Docs

Simply Wall St Company Analysis Model

repository·master·Indexed 23 days ago

https://github.com/simplywallst/company-analysis-model

Documentation and logic for the Simply Wall St stock and company analysis model. Covers the 2-Stage Free Cash Flow (DCF) model for intrinsic value estimation, adjusted historical free cash flow calculations, and growth rate estimation methods based on analyst estimates, historical performance, and the fundamental ROE method. Includes details on industry average fallback logic, market cap grouping thresholds, and metric mapping.

Tokens
11.3K
Snippets
10
Records
51
Agent score
82%

What's inside company-analysis-model

  1. Overview of the Simply Wall St Company Analysis Model

    master

    The Simply Wall St (SWS) app is an analysis platform that provides quantitative analytics to help investors identify and assess stocks based on specific investment parameters (e.g., high quality, income-oriented, or growth-oriented).

    Instead of providing direct investment advice, the model performs a series of quantitative "checks" across five assessment criteria to generate a visual summary called a Snowflake. The checks are based on widely accepted investment criteria used by successful investors and firms.

  2. Understand the Simply Wall St Company Analysis Model

    master
    The company-analysis-model repository provides full documentation of the logic and metrics used by Simply Wall St to analyze stocks and companies. The goal of this open-source documentation is to provide transparency regarding how specific metrics are selected and calculated during the analysis process.

  3. How the Snowflake visualization works

    master

    The Snowflake is a visual infographic used for quick scanning, comparisons, and portfolio views. Its appearance is driven by the scores of the 5 assessment criteria:

    1. Scoring: For each of the 5 criteria, 6 checks are performed. A successful check is assigned a score of 1.
    2. Aggregation: The total successful checks (0-6) are summed for each area.
    3. Shape: The total number of successful checks determines the size/shape of the snowflake. More successful checks result in a larger snowflake.
    4. Color: The snowflake is color-coded. More successful checks result in a more "green" snowflake, while fewer successful checks appear more "red."

    Sensitivity Note: The Snowflake is designed to ignore minor fluctuations. Four out of five axes only change when new company or analyst-level data is available. The Value axis is the most sensitive to share price changes, but changes must be significant to breach thresholds.

  4. How the Discount Rate is determined for DCF

    master

    The discount rate (Cost of Equity) is calculated using the following equation:

    Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)

    Component Definitions:

    • Risk-Free Rate: The 5-year average of the 10-year government bond rate. This approach is used to avoid the volatility of spot rates and better reflect long-term value.
    • Equity Risk Premium (ERP): Sourced from Aswath Damodaran. The model updates the ERP at least quarterly using incremental adjustments to avoid reactionary step-changes.
    • Levered Beta: A measure of volatility relative to the market.
      • For most companies, a bottom-up beta is used: the industry unlevered beta is adjusted (levered up) using the company's own debt level to account for its capital structure.
      • Constraints: The bottom-up beta is capped between 0.8 (the lowest practical beta for a stable firm) and 2.
      • For companies outside Canada and the US, the North American industry average unlevered beta is used.
      • Financial Firms: For financial institutions, the average levered beta of comparable companies is used directly as the bottom-up beta (it is not re-adjusted for capital structure).
    Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)

  5. Analyze Past Performance Snowflake checks

    master

    The SWS app analyzes the last 5 financial years of performance using these checks:

    Historical EPS Growth

    • CHECK #1 (Industry EPS): Company EPS growth is $>$ the relevant industry average growth over the past year.
    • CHECK #2 (5-Year EPS Increase): Current year EPS is $>$ EPS from 5 years ago.
    • CHECK #3 (Current vs Average Growth): Current year EPS growth is $>$ the average annual growth in EPS over the past 5 years.

    Return on Equity (ROE)

    • CHECK #4 (High ROE): Current year ROE is $> 20%$.

    Note: If earnings are negative in the starting period, SWS may inform the user rather than providing a growth ratio.

  6. How future growth rates are calculated using weighted linear regression

    master

    Instead of simple interpolation, the model uses weighted linear regression of forecast data from up to 50 analysts per stock, looking forward five years. This method generates a line of best-fit between annual data points to determine the growth rate based on the slope.

    Key Benefits:

    • Reduces Anomalies: Prevents astronomical growth rates caused by low-base effects or single bullish analysts.
    • Handles Negative Earnings: The regression approach allows for more accurate modeling of companies with negative earnings.
    • Market Representation: Data points with higher analyst coverage are weighted more heavily, making the rate more representative of market consensus.

    Impact on Metrics:

    • The calculated future growth rate is used in the Price-To-Earnings (PEG) ratio. Note that this PEG ratio may not be directly comparable to other websites that use a static +1-year growth rate.

  7. Income analysis data points and dividend checks

    master

    The Income analysis component of the model uses several annual data points to evaluate dividend health.

    Data Points Used

    • Dividend yield (End of day to -10 years): Annual
    • Dividend per share (LTM to -10 years): Annual, last reported
    • Dividend Growth Rate (annual): Calculated via linear regression of historical payments
    • Earnings Payout ratio: Last reported
    • Cash Payout ratio: Last reported
    • Estimate of Dividend per Share (+3 years): Annual, from analyst consensus estimates
    • Estimate of GAAP Earnings per Share (+3 years): Annual, from analyst consensus estimates

    Note: For American Depository Receipts (ADR), the dividend yield is derived from the primary listing, not the ADR.

    Dividend Scoring Checks

    1. Market Percentile (Low): Scored if Dividend Yield > 25th percentile of the company's market.
    2. Market Percentile (High): Scored if Dividend Yield > 75th percentile of the company's market.
    3. Volatility: Scored if there have been no annual drops in Dividend Per Share (DPS) of more than 10% in the past 10 years. Fails if the stock has paid dividends for < 10 years.
    4. Growth: Scored if the current annualised dividend amount > the annual dividend amount 10 years ago. Fails if the stock has paid dividends for < 10 years.
    5. Current Coverage: Scored if the payout ratio (Dividends per share / Earnings per share) is between 0% and 90% (100% for REITs).
    6. Future Coverage: Scored if the estimated payout ratio in 3 years (using analyst consensus) is between 0% and 90% (100% for REITs).

  8. Perform Cash Runway Analysis for Loss-Making Companies

    master

    For companies that are currently loss-making and have been loss-making on average, the standard Balance Sheet checks (#5 and #6) are replaced by more stringent Cash Runway criteria to assess sustainability.

    Required Data Points:

    • Levered Free Cash Flow (1-year)
    • Levered Free Cash Flow annual growth rate (Linear regression over past 3 years)
    • Cash & short-term investments

    Scoring Logic:

    • CHECK #5 (Stable Burn): Does cash and short-term investments cover stable cash burn (negative free cash flow) for more than 1 year?
    • CHECK #6 (Growing Burn): Does cash and short-term investments cover growing cash burn (negative free cash flow) for more than 1 year, assuming the burn rate grows/shrinks at the same annual rate as the past three years?

  9. Calculate Relative Valuation ratios (PE, PEG, PB)

    master

    Relative valuation compares a company's value to its industry peers using market-based ratios.

    Price-to-Earnings (PE) Ratio

    Indicates share price as a function of net income per share. Higher PE suggests a more 'expensive' stock. PE ratio = Current share price / Earnings per share

    Price-to-Earnings Growth (PEG) Ratio

    Indicates share price as a function of net income growth. A 'fair' PEG is typically between 0.8 and 1.0. PEG ratio = PE ratio / Annual net income growth rate (%)

    Price-to-Book (PB) Ratio

    Indicates share price as a function of net tangible assets (Book Value). Useful for capital-intensive or loss-making companies. PB ratio = Stock Price / Book Value per Share

  10. Analyze Health for Financial Institutions

    master

    Financial Institutions (Banks, REITs, Insurance, etc.) use a specialized set of Health checks because conventional debt measures are not applicable to their business models.

    Financial Institution Checks

    • CHECK #1 (Leverage): Is Leverage (Assets to Equity) $\le$ 20x? (Total Assets < 20 times Shareholders Equity).
    • CHECK #2 (Bad Loan Coverage): Is Bad Loan Coverage > 100%? (Bad Loan provisions > actual Bad Debts written off).
    • CHECK #3 (Deposit Risk): Is the proportion of lower-risk deposits < 50% of total liabilities? (Total Deposits > 50% of Total Liabilities).
    • CHECK #4 (Loan Concentration): Is the Loans to Assets ratio < 110%? (Net Loans < 110% of Total Assets).
    • CHECK #5 (Liquidity/LTD Ratio): Is the Loans to Deposits (LTD) ratio < 125%? (Total Loans < 125% of Deposits held).
    • CHECK #6 (Asset Quality): Is the Net Charge Off Ratio < 3%? (Bad Loans written off < 3% of Total Loans held).

  11. Understand Industry Average calculations and classification

    master

    Industry averages are used for relative valuation and are calculated using either the median or a market cap-weighted average (with boundaries to exclude significant outliers).

    Key Details:

    • Granularity: The model uses 68 specific secondary industries (e.g., Electrical Equipment) rather than 24 generic primary industries.
    • Update Frequency: Averages are updated every 6 hours for all 68 industries in every covered country.
    • Small Industry Handling: If an industry group contains fewer than five companies, the global average for that industry is used instead of the local average.

  12. Calculate fair value using the Excess Returns Model

    master

    The Excess Returns model is used for financial companies. It assumes equity value is derived from the firm's ability to earn returns above its cost of equity.

    Key Formulas:

    • Excess Return = (Return on Equity – Cost of Equity) * (Book Value of Equity)
    • Terminal Value = Excess Return / (Cost of Equity – Expected Growth Rate)
    • Company Valuation = Book Value of Equity + Present Value of Terminal Value
    • Value Per Share = (Book Value of Equity + Present Value of Terminal Value) / Shares Outstanding