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San Gold Corporation - Fundamental Stock Analysis San Gold Corporation - Fundamental Stock Analysis

Fundamental Stock Analysis as of July 1, 2014

A quick financial analysis of a company is one of the first things I always do when I am analysing a stock for a potential investment. To determine - at first glance - if the stock is fundamentally undervalued, I always check whether the stock complies with my preconditions for selecting undervalued stocks.

For the first precondition, I have checked if the stock is fundamentally undervalued by calculating the ratio's outlined in my article: How Do I Buy Stocks - 3 Revealing Ratio's for Selecting Fundamentally Undervalued Stocks. By complying with these 3 revealing ratio's, I can only choose between financially healthy undervalued stocks to potentially add to my stock portfolio.

The first calculation refers to the current ratio, which has to have a minimum value of 1.5. A ratio under 1 implies that the company is unable to pay off its current liabilities with their current assets. The current liabilities are all the company's liabilities which are due within twelve months - the current assets are all the company's assets which are reasonably expected to be converted into cash within twelve months.

For the second calculation, I check if the outcome of the tangible book value divided by the total tangible assets is at least 0.4 (for producing companies) or 0.8 (for exploration companies), as I do not feel comfortable investing in companies with a high level of debt. As San Gold Corporation is classified as a junior gold producer, the minimum value should be 0.4.

The third and final calculation which must be met, refers to my margin of safety and is calculated by dividing the tangible book value by the market cap. The outcome of this ratio must be at least 2, which implies that you can buy the stock at a discount of 50% from the company's tangible book value.

My Commentary and Conclusion Regarding these 3 Revealing Ratio's

In the following table you will see the outcomes of these 3 revealing ratio's for selecting fundamentally undervalued stocks. The used numbers were taken from the company's most recent balance sheet as at March 31, 2014, which you can find by clicking here.

Ratio 

Description  Minimum Value  Calculation (in millions)  Outcome 

Result 

# Current Assets / Current Liabilities  1.5  34.5 / 10.2 =  3.4  Passed 
# Tangible Book Value / Total Tangible Assets  0.4  (133.1 - 0 - 0) / (210 - 0 - 0) =  0.6  Passed 
# Tangible Book Value / Market Capitalization  2.0  (133.1 - 0 - 0) / (373.4 * 0.12) =  3.0  Passed 

As the outcome of these 3 ratio's is higher than the preset minimum values, the company complies with my first precondition, i.e. the company is determined - at first glance - as fundamentally undervalued. I can now analyse the stock further, to determine if the company also complies with the second precondition, i.e. management's interest must be aligned with the interest of the common shareholders.

 

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About Jeroen Snoeks

Jeroen Snoeks - UndervaluedEquity.com

Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for investors passionate about investing in undervalued stocks. Through UndervaluedEquity.com, he shares his experience and knowledge and will soon reveal his personal stock portfolio.


 
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