The Mohanram G-Score is a financial metric developed by Partha Mohanram, a finance professor. It's designed to identify stocks that are likely to be "glamour" stocks, which are typically high-growth companies with strong financial performance. The G-Score assigns a score based on eight different financial criteria, with higher scores indicating a higher probability of being a glamour stock.
How to Calculate Mohanram G-Score:
The Mohanram G-score calculation comprises eight criteria. One point is awarded for every fulfilled criterion, and subsequently, all the points are summed up to derive the G-Score.
Profitability
ROA (Score 1 if ROA > ROA Industry Median, 0 otherwise)
Cash ROA (Score 1 if Cash ROA > Cash ROA Industry Median, 0 otherwise)
CFO (Score 1 if CFO > Net Income, 0 otherwise)
Earnings Predictability
Earnings Variability (Score 1 if Earnings Variability < Earnings Variability Industry Median, 0 otherwise)
Sales Growth Variability (Score 1 if Sales Growth Variability < Sales Growth Variability Industry Median, 0 otherwise)
Accounting Conservatism
Research & Development Intensity (Score 1 if Research & Development Intensity > Research & Development Intensity Industry Median, 0 otherwise)
CAPEX Intensity (Score 1 if CAPEX Intensity > CAPEX Intensity Industry Median, 0 otherwise)
Advertising Expenditure Intensity (Score 1 if Advertising Expenditure Intensity > Advertising Expenditure Intensity Industry Median, 0 otherwise)
How to Interpret Mohanram G-Score:
The G-Score assigns a score of 0 to 8 based on various financial criteria. A higher score is generally better, indicating a higher probability of being a glamour stock. Here's a simplified interpretation:
- G-Score of 6-8: These companies are considered to have high growth potential and are likely to be glamour stocks.
- G-Score of 4-5: This indicates average growth potential. The company may have some growth prospects.
- G-Score of 0-3: Companies with lower scores may have lower growth potential and may not be considered glamour stocks.
Importance of Mohanram G-Score:
The Mohanram G-Score is important for several reasons:
- Growth Identification: It helps investors identify companies that are likely to be high-growth or glamour stocks, which can be attractive investment opportunities.
- Stock Selection: Investors can use the G-Score to filter stocks and focus on those with strong financials and growth prospects.
- Risk Assessment: Investors and creditors use the G-Score to evaluate the creditworthiness and financial stability of a company. It helps in managing financial risk.
What to Consider:
When evaluating a stock using the Mohanram G-Score, consider these factors:
- Industry Comparisons: Different industries may have different typical G-Score ranges. Compare companies within the same industry for a more meaningful assessment.
- Use as a Screening Tool: The G-Score can be a useful initial screening tool to identify companies that may require closer financial analysis.
Illustration:
Imagine you are evaluating two Indian companies, Company X and Company Y, using the Mohanram G-Score:
Company X: It has a G-Score of 6. This is based on various financial ratios and criteria that suggest a moderate level of financial health.
Company Y: It has a G-Score of 3. This is lower than Company X's score, indicating potential financial distress or lower-quality earnings.
In this case, you might have more confidence in Company X's financial health compared to Company Y, as suggested by their respective G-Scores.
In summary, the Mohanram G-Score is a straightforward metric that helps assess a company's financial strength and earnings quality. It can be a useful tool to identify potential financial issues, but it should be used alongside other financial metrics and analysis for a more comprehensive evaluation of a stock's financial health.
