Methodology

Understanding our exclusive Lincoln Financial Health model.

Our Financial Health model was developed by founder, Dr Merv Lincoln, to assess the credit risk of listed companies. It does this by using key accounting ratios and industry specific models.

Over time we’ve refined the model to delve further and identify both the strengths and weaknesses of a company’s financial accounts. The result is colour coded, allowing you to know the true financial position of a business within seconds.

We believe this is an essential tool in the stock purchasing process. Why? As you can see in the chart to the right, a large percentage of Australian stocks are exposed to unacceptable levels of financial risk, with many in danger of failure.

By being immediately aware, and understanding a company’s actual financial standing, you are in a better position to make informed and profitable decisions.

Health Of The Market


Instant Health Chart.

As mentioned above, our Financial Health model gives you an instant snapshot of the health of a company’s finances.

We calculate 12 key accounting ratios in order to assess a company’s level of profitability, strength of cash flow and debt exposure.

These results are then applied through our mathematical algorithm, producing a financial health score from 0.01 to 0.99.
A score of 0.01 represents strong financial health and the lowest investment risk, while 0.99 indicates a company is in significant financial stress.

Risk

  • 0
  • 0.1
  • 0.3
  • 0.5
  • 0.8
  • 1

Distress
Companies rated as Distressed display qualities of failed entities. They have a high level of financial risk exposure with substantial weaknesses likely across profit and loss, balance sheet and cash flow statements. In order to remain an ongoing entity, substantial changes are needed.

Marginal
A Marginal rating indicates an increase in financial risk exposure. The company must improve its profitability, increase cash flow and lower debt to remain a viable business and should not be considered an investment opportunity.

Early Warning
Companies rated as Early Warning are neither satisfactory nor unsatisfactory. Consider the rating a caution before investing, as they may suffer financial stress unless measures are implemented to rectify their financial health.

Satisfactory
Companies rated Strong or Satisfactory represent the best opportunity for investment. Their balance sheets demonstrate sufficient borrowing capacity and adequate cash levels to finance growth. Consistent profits have produced strong operating cash flows that underpin their operational strength.

Strong
Companies rated Strong or Satisfactory represent the best opportunity for investment. Their balance sheets demonstrate sufficient borrowing capacity and adequate cash levels to finance growth. Consistent profits have produced strong operating cash flows that underpin their operational strength.


Just a few of the corporate failures we saw coming.

We have a strong record of being able to identify corporate failures ahead of their collapse. As a result, our members have been able to avoid bad investments.

  • One.Tel Limited (ONE)
  • Dick Smith Holdings Limited (DSH)
  • Babcock & Brown Limited (BNB)
  • Gunns Limited (GNS)

One.Tel Limited (ONE) – 2001

One.Tel, heavily supported by both the Packer and Murdoch families, was Australia’s fourth-largest telecommunications company before it collapsed. With a market capitalisation at its peak of $5.3 billion, the company was highly acquisitive and raised capital on a regular basis. One.Tel’s Financial Health was in a position of Distress at its last financial report. While the company exhibited some strength in balance sheet ratios, it reported earnings losses over the periods leading up to its collapse.

Dick Smith Holdings Limited (DSH) – 2016

Dick Smith was previously a successful electronics retailer and was floated on the ASX in December 2013 by Anchorage Capital Partners. Red flags appeared in December 2014 when the company’s Financial Health rating deteriorated from Strong to Early Warning mostly due to falling operating cash flows, on the back of poor inventory management. Cash generation problems persisted into FY15 and its Financial Health rating fell to Marginal following a prolonged period of financial stress. DSH was placed into voluntary administration in 2016. This outcome, though disappointing, was easily avoided by our Members.

Babcock & Brown Limited (BNB) – 2009

Babcock & Brown was a global investment and advisory firm, known for its structured finance deals. The company had a peak market capitalisation of $9.1 billion in 2007 and was part of the S&P ASX 50 index, however it was placed into voluntary administration after unsecured bondholders voted against a debt restructuring plan. BNB’s Financial Health was in a position of Early Warning at its last three consecutive financial reports prior to failure, with negative operating cash flow weakening its cash flow ratios significantly

Gunns Limited (GNS) – 2012

Gunns, Tasmania’s largest private landowner and woodchip exporter, was placed into voluntary administration following a $904 million loss. The combination of a high Australian dollar, the global financial crisis and poor market conditions forced the company to sell assets to refinance and pay-down large debts. GNS’s Financial Health went from Satisfactory to Distress over four consecutive reporting periods, with weakness in its profit & loss, balance sheet and cash flow statement pointing to unacceptable financial risk.

Proven long-term performance

Secret Number 1: Research methodology

The truth is, there is no secret. Our process for finding the best investment opportunities starts with an in-depth analysis of a company’s financial health.

Once the unhealthy businesses are removed from consideration, our analysts begin a measured process that includes detailed research on a company’s recent results. We then make an assessment of the management’s track record and quality of earnings growth and/or income generation.

The final stage is to engage with the companies on our short list to assist with our modelling as we understand their strategic objectives and opportunities.

We do this by meeting with a company’s management team, conducting operational site visits, attending industry events and undertaking research on competitors to make peer-to-peer assessments.

Secret Number 2: The best of the best – ‘Star Stocks’

Once our thorough review process is completed, we change the status of a stock to become what we call Star Stocks.

Star Stocks are the most fundamentally superior stocks on the exchange from either a capital growth or income perspective. This exclusive list of great businesses has yielded exceptional returns over the long-term, consistently outperforming their market benchmarks.

Identification of these stocks is not all we do. We also actively and objectively track the day-to-day developments of every company we recommend. This includes delivering dynamic commentary based around company announcements and developments.

To assist you in finding the right stock, we categorise our Star Stocks into Star Growth and Star Income stocks. This allows you to remain focused on the end game.

Investment Success in three easy steps

  1. Stock Doctor analyses the financial heath and quality of every ASX stock to discover what we call 'Star Stocks.'
  2. Our analysts then validate and confirm the Star Stock selection.
  3. Lincoln Members
    invest with confidence and enjoy outstanding performance, with a
    choice between
    Stock Doctor and
    Managed Investments.


 

How our Financial Health Model can work for you

Download this White Paper and understand how we diagnose a healthy stock.



All figures, information and illustrations are as at 30 April 2017 unless stated otherwise.

^Disclosure - Star Stock Past performance: Star Stock (encompassing Star Growth, Star Income and Borderline Star Growth) returns were calculated by Lincoln as a measure of the historical performance of the strategy, reflecting the changes in recommendation and the performance of them over time and do not represent an actual investment. Investments go up and down. Past performance is not a reliable indicator of future performance and should not be relied upon.

The performance over the stated time period/s reflects the capital return and dividend income paid on a notional portfolio of $100,000 that is equally invested in each Star Stock at the commencement of the relevant performance period quoted. The portfolio is rebalanced to equal weight exposure when the composition of the Star Stocks changes. Dividend distributions are reinvested in the specific investments which generate the distribution on the appropriate ex-entitlement dates.

Transactions are calculated at the closing prices for the next trading day and it is assumed there is sufficient market liquidity to make the required trades at this price. Transaction costs of 0.5% on each purchase and sale have been incorporated into the performance figure. The calculation makes no allowance for other distributions, government charges or tax, or annual subscription fees payable to Lincoln.

Performance varies positively and negatively month to month reflecting the volatility of the equities asset class. Therefore, no performance figure should be taken as a reliable indicator of future performance.

The Star Stock criterion has not remained constant but has been revised and updated over time. The quoted performance reflects actual Star Growth Stock recommendations as they have been published to the public over time and have not been retrospectively implemented.