This stock screener was developed by x-fin.com on the basis of general approach to security valuation employed by Benjamin Graham and David Dodd. The stock screener compares intrinsic value of a stock with its current market price – the difference between them is called the margin of safety.
Intrinsic value of a stock (V*) is calculated as the sum of the following three components (on a per share basis):
- Tangible book value (TBV), which serves as a proxy for assets’ replacement costs or assets’ fair value.
- Value attributed to retained earnings, which are defined as the difference between Net Income (NI) and Dividends (Div). The value of this component is calculated as the value of a perpetual bond with the coupon equal to the company’s average yearly retained earnings, and the required rate of return for retained earnings (RRRre) of 20%.
- Value attributed to dividends. The value of this component is calculated as the value of a perpetual bond with the coupon equal to the company’s average yearly dividend (Div) and the required rate of return for dividends (RRRd) of 10%.
The resulting formula looks as follows:
V* = TBV + ((NI – Div) / RRRre) + (Div / RRRd)
A more detailed description of the valuation methodology can be found here: Graham-Dodd Stock Screener