The Prudent Investor's Stock Analysis Model (P.I.) promises to bring sophisticated investment analysis to the savvy investor's desktop. The brain child of seasoned investor Denis Tay, P.I. is a thorough and comprehensive computer aid for the dedicated stock picker.

P.I. starts its investigation deep within a company's annual and quarterly reports by focusing on financial statements. These statements provide the investor with a detailed look at a company's operations and as a result are of significant interest. Annual reports can be easily obtained for free by contacting the company directly, ordering a copy though the ICB (www.icbinc.com), or electronically through SEDAR (www.sedar.com). To unwind the twists and turns of financial statements, the Investor Learning Center (www.investorlearning.ca) has published a book called "How to Read Financial Statements". The effort needed to learn about financial statements is well worth it for the serious investor. In addition, Denis holds seminars to assist the novice investor with reading financial statements and using his model.

With a company's financial statements in hand, you can begin a P.I. investigation by starting up a recent version of Microsoft's Excel and loading in the P.I. worksheet. The first phase in the analysis is to do a quick check to make sure that the company you've chosen is worthy of a detailed analysis. This check requires historical information on the company's cash flow, debt, equity, number of shares outstanding and the current price per share. Based on this information, P.I. ranks the company in four different categories ranging from very conservative through to an outright gamble. If the company does not fit your risk preference you can discard it immediately and move on to another, or you can proceed to look at it in detail.

P.I.'s full analysis is thorough and as a result requires a few hours of perseverence to complete. For an optimal analysis, the model needs quarterly financial information, going back two or more years, including: sales, operating expenses, operating earnings, net earnings, earnings per share, current assets, current liabilities, debt, equity, cash flow and cash flow per share. P.I.'s main focus is on the company's cash flows and it uses a Cash Value Added model for price estimation and forecasting. Generally speaking, cash flow analysis is a respected valuation technique (see James O'Shaughnessy's survey of valuation techniques in the revised version of "What Works On Wall Street"); it is regrettable that the details of the cash flow model used by P.I. are not fully described. After crunching all the numbers, P.I. provides a detailed report that includes buy, sell and stop loss price levels along with a plethora of financial ratios and indicators organized in an intuitive and handy fact sheet. As an additional bonus, a variety of plots and charts are produced that provide a graphical review of the company's earnings, sales, return on equity and other fundamentals.

The Prudent Investor's Stock Analysis Model is well suited to the knowledgeable and dedicated stock picker. It is an ideal tool for active investment or share clubs where individuals can come together to understand the intricacies of financial statements and share in the research effort.

If you are interested in obtaining more information about P.I. you can contact Denis Tay directly (dtay@pathcom.com, 416-266-5766) or join the P.I. club online at http://clubs.yahoo.com/clubs/prudentinvestor.

First published in April 1999.