Classification of signal will be 1 or 0

Aggregate Signal Measure : R_SCORE (11 Mark

The aggregate signal is designed to measure the overall quality or strength o
Broad Categories Fundamental Signals to measure

∆ROE

YOY Sales growth

YOY Profit growth

Profitability YOY CFO growth

∆Leverage

Safety ICR

Liquidity ∆CR

∆TATR

Efficiency ∆GMR

∆PE Multiple
 ∆PE Multiple

Valuation ∆PBV Ratio

tion of signal will be 1 or 0
l Measure : R_SCORE (11 Marks)
the overall quality or strength of the firm's financial position.
Explanation
ROE=Net Income before Extraordinary Item scaled by Average Equity
∆ROE= Current Years ROE less the prior year ROE

If ∆ROE>0, the indicator variable R_ ∆ROE equals 1, zero otherwise. ( Pre

Condition-CY and PY ROE should be positive, otherwise R_∆ROE equals 0)
YOY Sales(TOR)growth= (CY Sales-PY Sales)/PY sales *100

IF YOY Sales Growth for 3 Consecutive Years is positive the indicator variable R_ YOY
Sales Growth equals 1, zero otherwise.
YOY Profit(Net Profit)growth= (CY Profit-PY Profit)/PY Profit *100
IF YOY Profit Growth for 3 Consecutive Years is positive the indicator variable R_ YOY
Profit Growth equals 1, zero otherwise.
CFO= Cash flow from Operations scaled by Average Total Assets
IF YOY CFO Growth for 3 Consecutive Years is positive the indicator variable R_ YOY
CFO Growth equals 1, zero otherwise.
∆Leverage= Change in the ratio of Total long term Debt to average total assets
If for 2 consecutive years there is decrease in financial leverage then it’s a positive
signal, the indicator variable R_∆Leverage equals 1, zero otherwise.
ICR=EBIT/Interest Exp
If for 2 consecutive years the ICR is greater or equal to 5, the indicator variable R_ICR
equals 1, zero otherwise.
∆CR=Change in the firm's current ratio between current and prior year
CR=Current Assets/Current Liabilities
If ∆CR>0 is a good signal about the firm's ability to service current debt obligation the
indicator variable R_∆CR equals 1, zero otherwise.
∆TATR= Firms current year TATR less the prior year TATR
TATR= Total Sales/Average Total Assets

An improvement in asset turnover signifies greater productivity from the asset base.
If ∆TATR>0 the indicator variable R_∆TATR equals 1, zero otherwise.
GMR=Gross Margin scaled by Total Operating Revenue
∆GMR=Change in the firm's GMR between current and prior year
An improvement in margin signifies a potential improvement in factor costs, a reduction
in inventory costs, or a rise in the price of the firms product.
If ∆GMR is postive the indicator variable R_∆GMR equals 1, zero otherwise.
PE Multiple= Price/EPS

Low P/E stocks allow you to pay less per Ruppee of current earnings, the high P/E stock
may be a better bargain if its earnings are expected to grow quickly. Low PE stocks have
generally been positive alpha investments using the CAPM as a return benchmark
∆PE Multiple=Change in the firm's PE Multiple between current and prior year
If ∆PE Multiple is negative the indicator variable R_∆PE Multiple equals 1, zero
otherwise.
PBV Ratio= Price/BVPS
Relationship = PE=PBV/ROE ( A high PBV Ratio nevertheless can have a relatively low PE
if its ROE is high enough.
∆PBV Ratio=Change in the firm's PBV Ratio between current and prior year
If ∆PBV Ratio is negative the indicator variable R_∆PBV Ratio Multiple equals 1, zero
otherwise.