Rating Penny Stocks: A Simplified Method of Analysis

Understanding the Bowser Rating System: The Key to Penny Stock Evaluation

The Bowser Game Plan relies heavily on a company’s Bowser Rating to guide investors in evaluating penny stocks. For example, to be considered for Company of the Month, a stock must be an 8 or above. This system breaks down into three essential categories: general information, balance sheet analysis and income statement analysis, covering 13 factors for a total of 13 possible points.

General Information

The first step in rating penny stock companies is reviewing the firms' industries and core businesses. If a company operates in a stable industry and provides meaningful products or services, it receives a point.

Additionally, the company’s 52-week high stock price is evaluated. If the high is twice the current price, it earns a point. This shows the stock's potential to gain momentum and appreciate.

Average trading volume is also critical—if the company averages at least 2,000 shares traded daily over three months, it earns another point. The importance of volume is tied to liquidity. In other words, investors should be able to buy and sell shares relatively easily.

Lastly, while dividends aren’t mandatory, companies that manage to avoid diluting earnings through dividends often get a point. However, not every company is in a position to pay a dividend, which is taken into account. Most companies receive a point for a dividend whether they pay one or not.

Finally, shares outstanding are a vital factor. Companies with too many shares dilute key financial metrics. Therefore, a company that aligns its shares outstanding with its revenue level gains a point. The ratio we’re looking for to award a point when rating penny stocks is one share for every $10 in trailing twelve-month sales.

Simplify rating penny stocks with the Bowser Rating System.

Balance Sheet Analysis

A strong balance sheet is an essential foundation for any company and a crucial consideration when rating penny stocks. A company's book value—its assets minus liabilities divided by outstanding shares—shows the company’s value. If book value exceeds the stock’s price, the company is technically undervalued in the market and receives a point.

Another important factor is the current assets-to-liabilities ratio, which shows how much working capital (an indication of liquidity) the company has. If this ratio is at least 1.8 ($1.80 in current assets for every $1 in current liabilities), the stock receives a point.

Lastly, long-term debt can burden a company, especially a penny stock. However, if it’s kept below 10% of annual sales, long-term debt is unlikely to overwhelm a company, and the stock receives a point.

Income Statement Analysis

Lastly, rating penny stocks' income statements will show whether or not the companies are growing. First and foremost, to be a viable business, a company needs a product to sell. Companies with annual sales exceeding $5 million earn a point.

In small companies, growth is paramount. Firms that show year-over-year growth on a quarterly basis in the following line items receive one point each:

• Sales revenue;
• Net income or earnings; and
• EBITDA (earnings before interest, taxes, depreciation and amortization).

Long-term earnings growth is also important to show a consistently expanding bottom line. To receive a point, annual earnings (or net income) need to have increased each year for the past two years.

Rating Penny Stocks: Putting it all together

To rate a penny stock, simply consider all of the factors above and award points in accordance with the system. We consider anything 8 or higher to be good.

However, this is a starting point. If you have a company that’s 8 or better, conduct deeper due diligence. Any company less than eight is not worth your time as a long-term investment.

In summary, the Bowser Rating System offers an objective and structured way for rating penny stocks, helping investors focus on fundamental data to make sound investment decisions. Try applying it to your analysis and watch the quality of companies you’re analyzing increase.