Gradement overview

TL;DR - Gradement helps investors by systematizing the fundamental analysis of public companies. We distill the complexities of accounting and the overwhelming information noise that investors face into a series of normalized, easy-to-use scores covering the most important aspects of a company's financials.

Courtyard of one of the first Stock Exchanges. Amsterdam, circa 1670.

Investing is not an easy task. It requires more than a few courses and books to master. As a complex discipline that still lacks a single, sound theoretical framework, investing can be challenging. Gradement helps you navigate this complexity by systematizing the fundamental analysis of companies.

There are three fundamental aspects to analyze for each company: its profitability, solvency, and price. Gradement automates the calculation of these three important variables using state-of-the-art accounting analysis techniques. Our methodology is grounded in the frameworks of Value Investing (especially for the price/free cash flow score) and the Austrian School of Economics.

Using the Scores

Despite the complexity of their calculation, the scores are extremely simple to use. All scores are normalized to a scale of 0 to 10.

For example, consider a company with the following scores:

• Firm profitability score = 8
• Dynamic solvency score = 9
• Price/free cash flow score = 2

This is a recurring pattern: highly profitable and solvent companies are often expensive. Investors want these companies in their portfolios, which drives up demand and, consequently, their market capitalization.

The ideal investment is a company that scores highly in all three categories. You will find fewer such companies in bull markets, while they are easier to find in bear markets. Gradement provides a screening tool to help you find these companies.

is = qs + ps

The is (investment score) is the company's primary score. It summarizes the company's profitability, solvency, and price into a single value.

The is score is a combination of two other scores, qs and ps. The first, qs, reflects the company's quality, while the second, ps, reflects the fairness of its price on the secondary market.

Thus, the is score provides a comprehensive evaluation of a company's economic and financial health, as well as its stock price valuation.

Solvency

The risk of insolvency is perhaps the factor that most drastically and suddenly affects a company's stock price. You can minimize your risk of investing in insolvent companies by using our dynamic solvency score.

This score could have helped you avoid investments in companies like China Evergrande Group, which entered into technical default in 2021; Eastman Kodak, which filed for bankruptcy in 2012; or General Motors, which filed for chapter 11 in 2009. For Evergrande since June 2019, Kodak since 2009, and General Motors since 2008, our dynamic solvency score for these companies indicated a value of zero—long before their insolvency became public knowledge.

Other Scores

In addition to the scores described above, Gradement calculates twenty-one other scores per company. These are our modified versions of existing, state-of-the-art accounting analysis techniques across different categories, including:

• The dynamic and static solvency scores are based on the work on solvency by Vicente García Martín and Manuel Fernández Gámez, both professors at the University of Málaga. They have developed one of the most comprehensive solvency analysis frameworks available.

• The valuation scores (price/free cash flow, price/balance, and price/free earnings) are based on the value investing framework. They compare the quoted stock price with the company's free cash flows, balance sheet structure, and free earnings.

• The zone score is based on the "Economic Freedom Index" published by the Heritage Foundation.

• And many others, each covering a relevant aspect of the company from an investor's point of view.