Identify some of the best ASX stocks to buy using Financial Health

Lincoln Indicators
Written by

Lincoln Indicators

Feb 22nd, 2022
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Throughout Australia’s Stock Exchange (ASX) history, there have been hundreds of corporate failures, both big and small. More prominent examples include household names like Alan Bond’s Bond Corporation (1989), James Packer and Lachlan Murdoch’s One.Tel (2001), consumer electronics brand Dick Smith (2016), and most recently, Virgin Australia (2020).

Through each corporate failure, many shareholders have lost everything – not because of complacency but because they lacked awareness of the actual quality of these businesses.

However, the reality is that corporate failures will continue to occur in the future.

So how do investors identify some of the best stocks to buy and protect themselves from the risk of significant loss?

The answer lies with two words – Financial Health.

This fundamental investment principle encapsulates the thorough due diligence that investors need to undertake on a business’s financial accounts before deciding to invest in a stock that could provide a high return investment.

Put simply, Financial Health assesses a company’s risk of insolvency by determining whether the quality of its cash flow and profits can service its balance-sheet debt.

The concept was first developed in Australia in 1984 by Dr Merv Lincoln, Lincoln Indicators’ Founder and renowned academic, business leader, and Olympic athlete.

Later, in the 1990s, the process was computerised and commercialised, and to this day, it remains Lincoln Indicator’s first and foremost Golden Rule of Investing.

Our Financial Health Model assesses a company’s underlying quality, investment worthiness and insolvency risk.

It calculates and combines 14 key accounting ratios extracted from a company’s public financial statements – including debt ratios, cash flow ratios, and profit ratios.

The outcome, a Financial Health Score, given to the stock, based on our pioneering quantitative methodology algorithm. It enables investors to focus on quality companies with:

  • A history of profitability
  • Manageable debt levels
  • Strong cash flows

It also enables investors to screen out the hundreds of companies that are financially unhealthy, high risk, and therefore highly speculative because of:

  • Weak or negative profits
  • High debt and/or intangibles
  • Poor cash flow

Without Financial Health to measure the risk of corporate failure, investors are walking into a minefield. As demonstrated by our Financial Health of the Market graphic, some 72% – or more than two in three companies listed on the ASX – have Early Warning or worse Financial Health and are therefore at risk of failure.

And this is why it’s so important. Ultimately, the Financial Health Model enables investors to instantly understand the solvency risk of a company. It acts similarly to insurance for their investments, allowing investors to make confident and informed investment decisions when identifying their best return on investment, while mitigating the risk of loss.

Financial Health has proven its worth. Since it was established, it has enabled Stock Doctor members and our Managed Fund investors to withstand economic shocks and, importantly, avoid the significant financial collapses that have littered the Australian corporate landscape and destroyed billions of dollars of shareholder wealth.

And, since inception, our Stock Doctor Star Stocks have significantly outperformed the market – providing investments with high long-term returns.

We strongly encourage investors to incorporate Financial Health into their investment process and stock selection decisions. Those who do will go a long way to protecting their portfolios and wealth and significantly increasing the chance of achieving financial success in the stock market and doing so with confidence and peace of mind.

To learn more about how the Financial Health Model works and understand how it is used in practice, get a free copy of our Financial Health white paper.

If you would like to see Financial Health in action to help you determine quality ASX stocks, take a FREE trial to Stock Doctor today.

Lincoln Indicators
Written by

Lincoln Indicators

Feb 22nd, 2022
Related topics
Information in this communication is current as of publication unless otherwise stated. It is provided for educational purposes only and may not reflect current market data or opinion. It should not be relied upon in respect to any current investment decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Important: This communication is provided by or on behalf of Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 for information and educational purposes only. This content may contain general financial product advice. It has been prepared without taking account of your personal circumstances and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. Investments can go up and down. Past performance is not a reliable indicator of future performance. Shares and other investments may go up and down in value, and their past performance may not be repeated and gives no guarantee of future performance. Information in this communication was current as at the date of its preparation, unless otherwise stated, and may be subject to change.

You should read and consider our Important Information and our Financial Services Guide (FSG) which sets out key information about the services we provide. Where our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Lincoln Australian Income Fund Product Disclosure Statement (PDS), Lincoln Australian Growth Fund Product Disclosure Statement (PDS) and Lincoln U.S. Growth Fund Product Disclosure Statement (PDS) for the product at before making any decision.

At the date of preparation of this communication, Lincoln, Lincoln Financial Group Pty Ltd or directors, employees and/or associates of these entities "may hold" interests in these ASX-listed companies. Further information about particular stocks held by these entities or persons from time to time is disclosed within the Stock Doctor program and may change at any time without notice.

Lincoln, Lincoln Financial Group Pty Ltd, any directors, employees and agents of these entities, make no representation and give no warranty as to the accuracy of this communication and do not accept any responsibility for any errors or inaccuracies in, or omissions from, this communication (whether negligent or otherwise) and are not liable for any loss or damage howsoever arising as a result of any person acting, or refraining from acting, in reliance on any information in this communication. No person should rely on this communication as it does not purport to be comprehensive. This disclaimer does not purport to exclude any rights under, or warranties implied by, law which may not be lawfully excluded.

Lincoln has taken precautions to minimise the risk of transmitting software viruses, but we advise you to carry out your own virus checks on any downloadable content. We do not accept liability for any loss or damage caused by software viruses.

Copyright © 2024 Lincoln Indicators Pty Ltd. All rights reserved.

All financial services are provided by Lincoln Indicators Pty Ltd ABN 23 006 715 573 (Lincoln) as the Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167.

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