Over the past 6 months I’ve worked on my approach to finding good investments and I think I’m quite happy for now. I started out just looking at price to book, which often gave me companies with lots of debt, i.e. Ennstone, which then fall over at the first sign of trouble. Then I looked at liquidation value and cash flow, to protect against such a failure. However, I’ve now simplified it so that I pretty much just look at liquidity (current and quick ratios) and debt to equity ratios. Once the companies are filtered by those criteria I just buy whatever is cheapest to book, with half book being the most I’ll pay. The ratios I use aren’t set in stone, but they are ball parks to get me started and the amounts come from various texts as ‘reasonable’ amounts.
