Knowing how to steer clear of disastrous investments is just as valuable as picking winners - this is why legendary investors such as Seth Klarman always advise prudent risk management. Take Volution (LON:FAN), for example, which is an adventurous high flyer company in the Industrials sector.
Volution pays out a rolling 2.15% of its share price in dividend payments. But sometimes a high dividend yield can signal scepticism from the market. How do we know if we can trust Volution's forecast yield?
One way to check is to see whether its financial health is improving or deteriorating. We want to avoid companies with declining financial health whose dividend payments might be at risk and invest in companies with improving fundamentals whose dividend payments are well supported.
Luckily, there is a tried-and-tested checklist tailored precisely to this task.
Why you need to know the Piotroski F-Score
Followers of celebrated accounting professor Joseph Piotroski are well aware of the checklist that made him famous at the turn of the millennium. Piotroski is behind the F-Score: a simple indicator to highlight stocks showing the most likely prospects for outperformance amongst a basket of apparently undervalued companies.
The great thing about the F-Score is that it essentially is an entire quality and fundamental momentum screen in a single number. Applying it as a filter on top of almost any strategy can help to increase returns and reduce risk.
The F-Score is made up of nine checks split up into three main areas of financial analysis. First is profitability, where it examines operating profits and cash flow to make sure the business can sustain itself and pay dividends. Then come three checks on the capital structure of a business, followed by a final look at the firm’s operating efficiency.
Volution (LON:FAN), its F-Score, and what you need to do about it
Stockopedia applies algorithms to its stream of financial data to automatically calculate the Piotroski F-Score for every stock on the market. It shows that Volution scores 9 out of a possible 9.
By investing in companies scoring 8 or 9 by these measures, Piotroski showed that, over a 20-year test period through to 1996, the return earned by a value-focused investor could be increased by an astounding 7.5% each year. Even better, it suggests that the company is well-placed to continue to pay out attractive dividends.
Find more high-quality stocks
This F-Score suggests Volution is a promising investment candidate and is worthy of further research - but it is only a first step. Higher F-Score stocks often trade at a premium compared to other stocks. Investors like to pay up for quality but it's important not to pay too much. We suggest checking the various value factor measures for Volution on the group's StockReport.
For years, the Stockopedia team have been poring over studies to see what works in investing. That's how we found the F-Score, but that's not all we've found... So take a two-week free trial today to see how Stockopedia can help you to build a better portfolio.