Pre-built factors vs build your own

Why you should use pre-built factors whenever possible

What are the advantages of using Portfolio123’s pre-built factors rather than writing your own formulas?


Let’s take an example: EV2EBITDATTM. This factor compares a stock’s enterprise value to its last twelve month’s EBITDA.


If you wanted to write your own formula, why not simply use EV / EBITDATTM? Or, to take it one step farther, why not use (MktCap + PfdEquityQ + DbtTotQ + NonControlIntQ - CashEquivQ) / EBITDATTM?


Well, for one thing, sometimes EBITDA is negative, and sometimes enterprise value is negative. You’d have to control for all those cases. If you’re looking for companies with low EBITDA to EV ratios and you didn’t control for those cases, companies with negative EBITDA and positive EV, as well as companies with positive EBITDA and negative EV, would all get the highest scores. When I first started out at Portfolio123, I made exactly that mistake, and almost bought a bunch of stocks with negative EBITDAs.


At Portfolio123, we take care of these problems by giving all such stocks a value of NA.


But in addition, we get you fallbacks. EBITDA is the same as operating income before deducting depreciation and amortization. If EBITDA is NA, then we look at operating income after deducting depreciation and amortization and add depreciation and amortization back to it. And if depreciation and amortization is missing from the income statement, then we look to see if it’s in the cash flow statement.


We do the same kind of thing for enterprise value. If you were to use MktCap + PfdEquityQ + DbtTotQ + NonControlIntQ – CashEquivQ, you’d have a lot of companies with one or more of those items being NA. We have fallbacks for these items so that if EV is NA, you can be reasonably sure it's because it’s negative.


Moreover, we have fallbacks for TTM values. If you were to simply add up EBITDA from each quarter and one quarter had a missing value, you’d get NA for the entire equation—either that, or you’d get only three quarters of the total EBITDA. Here’s what Portfolio123 does: if one quarter is NA, we pull the value from the previous quarter and use that in our TTM calculation. You’d have to write a lot of fancy language to do that on your own. For other factors, such as interest expense, we’ve gone even further in developing values that will make sense.


There are also a lot of stocks that issue only semiannual statements. For those the TTM value is the sum of the last two rather than the last four statements.


So don’t think you’re smarter than us and try writing formulas yourselves if there are good P123 formulas already there. We try to stay on top of every problem.