In this lecture, we will study the G score. Now, we have been discussing for quite some time that g score is used for score rating the growth stocks, just like we have used Petroski f score. For rating the value stocks, we will use g score for rating the growth stocks. As the bottom line g score is a number between zero and eight, which is used to assess the strength of a company's financial position. Now just like f score was a number between zero and nine. The score is a number between zero and eight.

G score is used by financial investors in order to find the best growth stocks. Just like Petrovsky f score g score provides a objective mechanism to determine which is a better stock and which is not a good stock number close to zero means that the stock is not so good. And our G score close to eight means that the stock is good for investment. g square was formulated by Professor Mohan ROM of Columbia Business School. Like I had mentioned before, before we study a particular formulation, it is very important to go through the abstract of the paper. The abstract of the paper gives the gist of what exactly the paper is all about and what what is the difference it will make to your investing strategy.

I provided here the abstract as is written by Professor mon Rob. Let's go through the abstract together. The abstracts is that the paper tests whether a strategy based on financial statement analysis of low book to market growth stocks is successful in differencing differentiating between winners and losers in terms of future stock performance. So, the strategy is being discussed for finding out the future of a stock performance. The second thing to notice is that it is discussing low book to market stocks, low book to market stocks basically means in the is a high market to book Stocks high market to book stocks means high PB stocks like we have discussed price to book value basically means the market value divided by the book value. So Govan ROM is clearly discussing growth stocks here.

It further says, I create an index g score based on a combination of traditional fundamentals, such as earnings and cash flow and measures appropriate for growth firms, such as stability of earnings and growth and the intensity of RND capital expenditure and advertising. So, more RAM considers traditional fundamentals such as earnings, cash flows etc. Also, he considers factors like intensity of r&d, capital expenditure, advertising, etc for determining which is a better growth stock. Further the paper says a strategy based on buying high g score forms and shorting low g score forms consistently. Significant excess returns. So, we should buy the forms whichever got a high g score, and we should sell the forms, which are what a low g score.

The result are a robust across partitions based on size stock price earnings following exchange listing and the price performance and are not affected by the inclusion or omission of IPO forms. So, the most important thing to notice that he says the results are robust and this has been proved the results are robust. And it does not matter what is the size of the company or what is the stock price of the company, etc. You can read the rest of the abstract by yourself. I have attached the complete paper in this lecture. So I would highly encourage you that you read the complete paper to understand bond Graham's formulation accurately.

Now that you have got the basic idea of the formulation of G score. let us study the G score in details. The first point to note is that in G score, we evaluate a growth stock based on eight parameters. This is just like with Roski where we evaluated a value stock based on nine parameters in G score, we evaluate a growth stock based on eight parameters. For each parameter that we evaluate, we give a stock a score of one or a zero, there is nothing in between. So, either it is one or it is zero.

So g score is always a number between zero and a zero being the least favorable for the stock and a being the stock recommended highly for purchasing. Before we proceed to understand GS code, let us take a stock as an example, which we can examine, as we are studying the different parameters of GS code, we will take the stock of dabber, India, India Limited. Now you notice here, the P of this talk is 58.79. So clearly it's a very high IP, the PB is 12.32. So it's a very high PB, and the dividend yield is 1.87%. So it's a very low dividend date.

So, according to a formulation of growth stocks and value stocks, this stock very clearly is a growth stock. Now, if you notice, more Anjouan considers only PB as a factor for determining whether it's a growth stock or not a growth stock. Now that we have a stock to examine ready with us, let us study the different parameters of monogram g score. The first parameter is earning returns on assets. Earning returns on assets is calculated by monogram as net income before extraordinary items divided by the average total assets of the last two years. That is takes the total assets of the current year in the previous year and finds average between these two numbers.

If you remember, Petroski also considers returns on assets as the first parameter in the formulation of EPS However, with Trotsky I've taken the total assets of the beginning of the year as the factor by which he divides the net income before extraordinary items. returns on assets is a very important financial ratio to study when studying the fundamentals of any stock. The returns on assets shows that the percentage of profit of company earns in relation to the overall resources. So a higher return on asset basically means that the company is making more profits using less amount of resources. In more run g Scott formulation, Professor Morrow says to assign one if the ROI of a company is greater than the industry median, otherwise to assign a zero. Now, we have to find the industry median.

I could not figure out the source from where I could find the industry median for every different parameter. So I hit upon a strategy. Now what I did was for a given company I founded the Top 10 pr companies of this of this particular company. Let's say for example for double India Limited, the top 10 pr companies are Bajaj Corporation Limited guzzlers Industries Limited Colgate palmolive limited mommy limited Jyothi laboratories godrays consumers, ciders, wellness, Procter and Gamble Mariko and Gillette India. Now, these top 10 companies, which are the peers of these companies readily available from any financial website. Now, if you study the same parameter for these top 10 companies, then using this 11 companies results, we can find the industry median from the annual reports for the year 2017 2018.

I found the net income, total assets of the current year and the total assets of the previous year for all these 11 companies. Now, the net income is available from the income statement of the companies and the total assets is available from the balance sheet of the company. Now, listed here are the Net income before extraordinary items are all 11 companies, the total assets of the current year and the total assets of the previous year is also kept is provided here. Now, we can calculate earnings returns on assets as net income divided by the average of total assets of the current year and the previous year. So, the figures of ROI are provided here. So, the ROI for dava, India Limited is 1.02 for Bajaj corporation is 1.37 and the remaining you can see here now, for all these 11 companies, we find the median of these values of ROI.

So, the median value comes out to be point nine four. So, the earnings return on assets for debenture Limited is 1.02. Why the industry median is 0.94. Now, since 1.02 is greater than 0.94 we assign a score of one on earning returns the returns of assets for double India Limited the second parameter gees code is cashflow returns on assets. Cash Flow returns on assets is calculated as cash from operations divided by average total assets of the last two years. Now average total assets of the last two years is found by averaging the figures of total assets of the current year and the total assets of the previous year.

Now, we assigned one if the cashflow returns of assets is greater than the industry median, or else we assign a zero. Now we know that a higher cash flow return of asset indicates that a company is doing better at generating cash flows from its assets. Conversely, a low ratio indicates that a company is not efficient in utilizing his assets to generate more cash flows. From the annual reports for the financial year 2017 18 for all these 11 companies, I have figured out the cash from operations for each of the companies. The figures are shown here. We already found the total assets at the beginning of the year and the total losses of the previous year from the annual reports of 2017 18 for each of these companies, now using these figures we can calculate the cash flow returns of assets for each of the companies.

So for India the cash flow returns of assets is point two five. Similarly for Bajaj corporations it is point four five and for ciders wellness it is point two zero. So now we can find the median value of all these figures to arrive at the industry median which works out to be point two zero. So, we figured that the cash flow returns of assets for India Ltd is point two five while the industry median is point two zero since point two five is greater than point two zero we assign a one to dabber India on the account of parameter two that is cashflow returns off asset. The third parameter in G scores is accruals. Now to calculate accruals we need to find the cash from operations and the net income in the cash flow operation.

Is greater than the net income, then we assign a value of one, otherwise we assign a value of zero. Now, we know that when a product is sold or a service is rendered, revenue is realized. However, cash doesn't flow into the company we did the cash flows into the company. So the payment terms agreed between the two parties. So, this is the accrual that is money which is when public services or products have been rented, but it has not been realized. If the accuracy is very high.

That means the company is running a risk, because they can be defaults in terms of collecting the money for the services or products which have been already provided. From the annual reports of Gov India Limited, I gather that the cash from operations is 137 3.13 crores, whereas the net income for dubber, India Limited is 5609506 crows. Now clearly, cash from operations is less than the net income. So we assign a score of zero to our investors. parameter three that is accruals. The fourth parameter of G score is stability of earnings.

To calculate the stability of earnings, we need to find the quarterly earnings returns of assets for the last four years, that is, we have to compute 16 figures for each quarter for the last four years and then find the variance of these 16 figures. Now, if the variance is greater than industry mean that then assign a value of zero otherwise assign a value of one, if the variance is greater than the industry means it means that the variance of these companies earnings returns on assets is what is more that is it is more unstable as compared to what the industry median is. Now we know that to calculate the earnings returns on assets, we need the net income before extraordinary items and divided by the average total assets for the current year and the previous year. Now from the quarterly state Once we can get the net income before extraordinary items, and also we can get the figure of total assets of the current year.

In the same quarterly statements, we will get the total assets of the same quarter in the previous year. So, we can use these figures to calculate the earnings returns on assets. Now, in any company's website, you can find the quarterly statements from where you can get the quarterly figures for each company, calculate the stability of earning, I gathered the quarterly reports of all the 11 companies from the financial year 2012 13 till financial year 2017 18. Now from the quarterly reports, I gathered the figures of net income and the total assets of the current quarter as the total assets of the corresponding quarter in the previous year. Now, based on that I calculate the earnings return on assets and then found the variance of these triggers. The variance for India Ltd is point 00083.

Whereas the industry median works out to Part 00057. Clearly part 00083 is better than part 00057. So we assign a score of zero on stability warning to dabber. India Limited. The fifth parameter of G score is sales growth variability. To calculate sales slowed variability, we need to find the quarterly growth of sales for the last four years, and then find the variance of these numbers.

Now, from the quarterly reports, we can figure out what is the sales volume of each quarter. Now once we have calculated the sales volume of each quarter, we can find the growth of sales in each of the quarters from these figures. Once we get the growth rate of sales in each of the quarters, then from these numbers, we can find the variance. Now if the variance is greater than industry mean for the company, then we assign a zero otherwise, so now what so from the quarterly reports, I gather that sales code variability for that Indian Limited is 0.10 to one, while the industry median is 0.1315. Now 0.10 to one is less than 0.1315. So we assign a score of one to divert India Limited on sales growth variability.

The sixth parameter is r&d intensity. r&d stands for research and development. So Professor ball ram takes into consideration how much the company is spending on research and development. We know that growth stocks do not provide so much too much off dividend. Instead they use the profits for expansion or research and development etc. So it is important to understand how much a growth stock is spending on research and development.

Now we can calculate r&d intensity as amount spent on r&d in the current year divided by the total assets at the beginning of the year. See the difference here here from 100 considers total assets at the beginning of the year. Now the assigned one is the r&d intensity of the company's good than the industry mean, otherwise we assign a zero. From the annual reports of 2017 2018 I figured out how much of money was spent by each of these companies on research and development. Now, double India spent a total of 32.04 crores on research and development. There are companies like Procter and Gamble which spent a huge amount of research and development while there are companies like Gillette India, which spent nothing on research and development, the r&d intensity for debris India works out to 0.01 while the industry median works out to 0.003 to 0.01 is greater than 0.0032.

We assign a score of one on RND intensity to our India Limited. The seventh parameter of G score is capital expenditure intensity. This is calculated as amount spent on capital expenditure in this year divided by the total assets at the beginning beginning of the year. We assign a one if the capital expenditure intensity for the company is greater than The industry mean for capital expenditure in the intensity otherwise you assign a zero. Now, we know that growth stocks are the companies which utilize their profits for expansion, capital expenditure research and development etc. So, if a company which is considered a growth stock is spending more on capital expenditure than it is considered to be a better company and if the capital expenditure intensity is greater than the industry mean that means to say this company must be a better growth stock as compared to other stocks in the same industry.

From the annual reports of the financial year 2017 18. For the seven companies I figured out the capital expenditure as shown in their records. Now, the figures are shown here. For double India the capital expenditure intensity works out to 0.02. While the industry median works out is 0.03. As 0.02 is less than 0.03, we assign a score of zero on capital expenditure intensity, for India Limited.

The last parameter Professor montcalm considers in G score is advertising expense intensity. Advertising expense intensity is calculated as amount spent on advertising in this year divided with the total assets at the beginning of the year. So we assigned one if the advertising expense intensity for the companies rather than the industry mean, otherwise you assign a value of zero from the annual reports for the financial year 2017 18. For each of these 11 companies, I figured out the amount spent on advertising by each of these companies. So the advertising intensity for double India works out to 0.09 while the industry median also works out to 0.09 as 0.09 advertising expense intensity of Gov India Limited is not greater than 0.09, which is the industry median. So we assign a score of zero to dollar India Limited on advertising expense intensity.

So evaluated the stock of governing India Limited on all the eight parameters of Bodrum g score. So we find that on the parameter earning returns on asset monogram g score assigns a score of one to our India Limited for cash flow returns of asset the score assigned is one for accrual to the zero for stability of earning it is zero for sales load variability it is one RND intensity it is one capital expense intensity to zero and advertising intensity it is zero. To find the GS code, we take the scores of each individual parameter and add them up. So davara India gets a z score of four. So, we are found out how to find the z score for a particular stock. Next, we will look at how to use this value of G score for determining which mutual fund is better and which is not so good.

Thank you for listening. See you in the next lecture.