In a different post I posted Cohesant's “5-minute” test.

Today I'll write about to perform that test.

The 5-minute test was written about in “It's Earnings That Count” by Hewitt Heiserman.

The nine criteria are:

1: Auditors opinion: Each company has to have an auditor check its financials, and give their opinion to be printed in each report. These opinions could be bad or good opinions of the companies accounting. In the first criteria the auditor's opinion of the companies financials must be positive.

2: Lawsuits: Just about every company has at least one lawsuit against it at any give time. This criterion just asks that the company does not have any material lawsuits that could hurt its future. Companies usually write about any current lawsuits in the footnotes in the annual report, you can also find them by searching the company on google.com and reading the articles about it.

3: Unusual Losses: This one is pretty much self-explanatory: Useless inventory, bad debt, unusual losses, etc. could all be considered unusual losses. No more than one these in the past three years.

4: Earnings Restatements: Heiserman doesn't like to see any earnings restatements, ever. They are damaging to a company and, while sometimes they are temporary, high growth stocks are not likely to be able to sustain if they happen, see Krispy Kreme.

5: Intangible Assets Ratio: Intangible Assets must be viewed skeptically. If the company decides to the assets are impaired they can write them off which damages stockholder's equity. The Intangible Assets ratio is: Goodwill + other intangibles / Total Assets. Intangibles must be less than twenty percent of total assets.

6: Debt-o-Equity ratio: the debt to eguity ratio measures the company's ability to pay off debt, its credit worthiness. The formula is: All interest bearing debt / stockholder's equity. Avoid companies that have a debt/equity ratio over 75%. This ratio can easily be found on The Yahoo Finance Key Statistics page.

7: Revenue growth: Revenue growth is a must. Some companies with flat revenue growth may be able to keep growing earnings thru cost cutting, but this is a ploy that can only last for so long. We like to look at a company's five-year revenue growth. So this year we would take 2004revenue – 1999revenue / 1999revenue. The revenue growth should be at least 30% over the last five years. This criterion is where Cohesant tripped up with only 22% growth.

8Stock-Based Compensation Ratio: We should view options as a hidden expense that juices a company's profitability. Companies tell us what their stock-based compensation is in the footnotes of the annual report. The formula is: Stock based compensation / accrual profits. This should be under 15%.

9Short ratio: Usually when an equity has a high short -- betting on it going down -- ratio it isn't good to invest, why else would so many people be betting on it going down? This ratio is also available on the Yahoo key statistics page, but just for the heck of it I'll show you how to do it. The formula is: Shares Short/ Float. You can find both of these number on Yahoo!.

There it is, if I confused you too much I would be happy to walk thru it with Applied Materials -- the only Annual Report I have with me.

Most good Value stocks will fail a few of these tests. But, that is okay as this test is really for high growth companies, and not as much for 50 cent dollars.

-Mike