Reading Jupick grades: what S, A, B, C and D say and do not say

Jupick summarizes the financial condition of major Korean and overseas stocks with a five-step grade from S to D and a score from 0 to 100. It compresses dozens of numbers scattered across the financial statements into one grade calculated with the same yardstick.

The key is “the same yardstick.” Because metrics that vary from stock to stock are scored on a single standard, different companies can be set side by side and their financial strength compared. That is the reason the grade exists.

The grade is a “current status report” that summarizes financial data already disclosed. It shows what financial strength a company has now and holds nothing beyond that, and this is the first thing to understand about it.

The five grades divide the overall score into bands. S is the top band, A the upper band, B the middle band, C a somewhat weak band and D a band that needs improvement.

Put simply, S and A can be read as financial metrics that are solid across the board, B as an unremarkable middle, and C and D as a noticeable weakness in one or two areas.

A grade is set by the band a stock's own overall score falls into, and the scores of other stocks have no effect on it. None of the five bands contains a line that separates passing from failing.

The overall score is a weighted average of the scores in three areas: profitability 40%, financial stability 35% and dividends 25%.

Profitability (40%) uses ROE, operating margin and revenue growth to see how well a company turns its capital and sales into profit. It carries the largest weight of the three because the power to earn a profit is, in the end, the root of a company's finances.

Financial stability (35%) uses the debt ratio, current ratio and interest coverage to see whether the company has the strength to carry the weight of its debt. Dividends (25%) use dividend yield, payout ratio and consecutive dividend years to see whether returns to shareholders are steady.

The three areas are scored separately so that strength in one area does not hide weakness in another. For a company that earns well but carries heavy debt, or one that pays generous dividends but has stopped growing, it is possible to see separately where each one gains and loses points.

The 0 to 100 overall score produced by the weighted average turns into a letter grade according to fixed bands. A score of 85 or higher is S, 70 or higher is A, 50 or higher is B, 30 or higher is C, and anything below that is D.

These cutoffs apply the same way to every stock. The standard never shifts to favor or disadvantage a particular stock, so the grades of different stocks can be compared as meaning the same thing.

A stock whose score sits close to a cutoff can move up or down a grade with only a small change in its metrics. Looking at the score together with the grade shows whether a stock is near the top or the bottom of, say, grade A.

Jupick's overall grade does not include valuation metrics such as PER (price to earnings ratio) and PBR. These two are shown separately on the stock page. The reason is that the grade and valuation answer different questions.

The grade answers the question “Are this company's finances sound?” PER and PBR answer an entirely different question: “Is the stock price now high or low relative to those finances?” A “good company” and a “low stock price” are separate matters.

A good company can trade at a high price relative to its earnings, and an ordinary company can trade at a low one. Mixing the two into a single grade blurs which story is being told. So Jupick separates financial strength (the grade) from price level (valuation), so that users can look at the two questions separately.

This is the most important part. The grade is not a forecast of future stock prices. A high grade is no assurance that the price goes up, and a low grade does not mean the price goes down. The grade only summarizes financial metrics already reported and contains nothing about future prices.

The grade looks at only one side of a company: its financials. Factors that numbers do not capture, such as changes in the industry, management's ability, the success or failure of new products, regulation and competition, are not in the grade.

The grade is the result of mechanically calculating public data, so if the source data is delayed or wrong, the grade is affected too. The grade is a starting point and a comparison tool for understanding a stock. Investment decisions and responsibility for them rest with the user. Jupick gives no trading advice and no price forecasts.