by Jitta
Dec 29, 2020 • Last updated: Jan 12, 2023
Jitta Updates Algorithm with Increased Analytical Precision for New-Normal Investing

This year, stock markets have been characterized by a gigantic roller-coaster hill due to the Covid-19 pandemic. 

The free-fall drop that occurred when markets worldwide shrank sharply during the first quarter, as lockdowns halted economic activities, was followed by an about-face recovery when restrictions were lifted in mid-2020. Some markets have regained their losses. Many have reached new-highs in the fourth quarter.

But once you step back and look at broader market movements, you’ll realize the 2020 “crisis” was anything but. A 10-20% drop in value is expected from time to time in the stock market.

Even though this year many stock markets haven’t performed well, we believe any long-term investors who’ve done their homework and invested in strong companies with growing revenues and profits could still muster positive returns. The downturn presented a once-in-a-decade opportunity to invest more capital.

Jitta Ranking always follows Warren Buffett’s principle – ‘To buy a wonderful company at a fair price’. In 2020, our rankings have made healthy returns and overcome market indices in many countries; even though, our selected stocks were from Jitta’s analytics in early 2020 and Jitta have yet to adjust anything during the pandemic.

The returns of Jitta Ranking in 2020 will be revealed in early 2021.

This proves that value investment principle can help investors to beat fluctuations and obstacles of stock markets. The stock portfolio would drop in line with the market situation, but it can perform well and sturdily in a long run due to investing in good enterprises.

Jitta believes that the value investment principle and Jitta Ranking can bring healthier returns than market indices. In general, this principle will make wonderful returns in 1-2 years after the economic crisis.

Jitta’s current algorithm can analyse and select well-performed stocks, but our team does not stop to develop and improve our algorithm, so Jitta Score, Jitta Line and Jitta Ranking must be better and better every year.

By the end of 2020, Jitta will update the new algorithm which is more accurate in the stock analytics. Details below are two new updates. 

Increased valuation precision for Jitta Line

Jitta Line is a company’s fair value. In simpler terms, it’s the price you should be paying if you want to buy the whole company and break even in 10 years.

If the company generates consistent cash flow every year, it’s really easy to come up with the valuation: 10 times a year’s cash flow.

For example, the company generates 1 million every year, the fair value of the company is 10 times that, or 10 million.  

But reality is not that simple.

Some companies increase their cash flows consistently every year, while others experience consistently decreasing or erratic cash flows.

Jitta has been calculating Jitta Line based on how much money a company can make in the last 10, 5 and 3 years to forecast its future cash flow. 

This results in companies whose cash-flow trajectories are the same, despite varying degrees of consistency, receiving the same Jitta Line. 

This update will add cash-flow consistency into the computation. The algorithm will determine the growth and volatility of the cash flow in the last 10, 5 and 3 years before calculating Jitta Line.

So companies with consistently growing cash flows will receive higher Jitta Line than those with inconsistent but increasing cash flows.

We would give some examples of Company A, B and C to show their historical cash flow over the past 10 years.

The above table shows similar growth of cash flow between Company A, B and C in 3, 5, 10 years, but the year-on-year change shows such a different quality of cash flow.

Company A is the best ability to generate its cash flow because of the year-on-year growth consistently. It can assume that Company A has its highly competitiveness without problem to set product prices and handle business crisis.

Another one is Company B. The table shows an increasing of its cash flow, projected its long-term growth, but there are some fluctuations in each year.

The last one is Company C that has highly movements of its cash flow. Some years have a cash flow deficit while some periods have such a high cash flow.

If all three companies have similar financial and business factors, the appropriate valuation or Jitta Line for Company A is better than Company B which has Jitta Line higher than Company C. So, the simple principle is that the more cash flow grows consistently, the more valuation is higher.

This table is just the example. In fact, the cash flow of Company C is not quite practical in an actual situation because the fluctuation means less competitiveness and that company’s products rely much on the demand-supply market. This cash flow type seems to move in line with a business cycle and it is not as same as Company C.  

Additionally, the new Jitta Line will put heavier emphasis on the last 3 years of cash flow to quickly reflect recent changes in business performance.

Emphasis on revenues and cash flows for technology stocks

Most technology companies have their business structures to develop their software products and offer their services like digital platforms. If we take a look at their financial reports, we will find some conflicts that they can generate high revenue growth, but net profit is quite low or some companies post net loss in the reports consecutively.

This conflict causes from current financial reporting standards that focus on records of revenue and expense for companies which invest in tangible assets such as raw materials, machinery, factories, etc. On the other hand, technology companies expand their businesses in intangible assets which are software and digital platforms.

In fact, many healthy technology companies that post their net loss reports can generate high cash flow from operating with a consistent growth. That brings cash on hands to expand their digital businesses, increase platform users and generate a revenue growth unlike conventional companies that cannot expand their businesses when posting net loss.

Another conflict is stock-based compensation or share scheme to employees and it is a main expense of technology companies. They consider that employees are the crucial asset that create many intellectual properties.

A cost of the share scheme is recorded as expense list of financial reports. Technically, this expense does not pay by cash while it is calculated back in cash flow statement. So, the cash flow of technology companies is very huge.

We will give some examples to compare between net profit, share scheme expense and cash flow statement for technology companies. The first table is 5-year historical figures of AMZN or Amazon.

AMZN’s share scheme expense pulls down its net profit. In 2015, the operating cash flow added the share scheme expense and other non-cash expenses, we discovered that the cash flow statement of AMZN increased 20 times higher than its net profit.

During 2016-2019, AMZN’s operating cash flow is larger than its net profit many folds. On the contrary, conventional companies normally have the operating cash flow higher than the net profit roughly 30-100%.The second table is figures of Salesforce stock – CRM.

When adding the share scheme expense and other expenses, CRM’s operating cash flow is much higher than its net profit. In 2015, the company posted the net loss of 47 million US dollar, but the operating cash flow stood at 1,672 million US dollar in the same period.

CRM’s net profit and loss were volatile, but its cash flow grew over the past 5 years.

For technology companies, we can not focus on net profit reports like conventional companies because of different methods on revenue and expense records. Therefore, Jitta needs to develop our algorithm in a calculation of Jitta Score and Jitta Line with keeping a weight on the revenue growth and cash flow statement and focusing less on net profit and loss report.

This new algorithm for technology companies aims to reflect the actual competitiveness and the company’s strength.

New algorithm updates ready on January 1, 2021

We’re going to start rolling out the new updates after the market closes on December 31, 2020, and complete the upgrades by January 1, 2021, to get ready for the first trading day of the new year.  

For Jitta Ranking Return on that is reported annually, we will update all stock list with the return ranking and historical data on December 30 to match the analytics of new algorithm.

Due to all data on this website has been updated when Jitta developed the first algorithm in 2014, the time has passed 7 years now and Jitta, itself, has improved our algorithm versions many times. So, Jitta team has considered and agreed to improve stock list with the historical return ranking to be more accurate and investors can use the stock list to study together with the latest analytics.

Moreover, the team still keeps the stock list and historical data under the old algorithm for one year in order to compare with the new one and investors can visit for further consideration.

Finally, Jitta would like to thank all investors for supporting us because Jitta was founded from what investors need and we are committed to improve tools and services for investors’ benefits.

Apart from the new algorithm that allows investors worldwide to use for free, Jitta Wealth has broken all limitations in 2020 to support Thai investors to step into a foreign investment with offering a low management fee for personal fund services, including a reduction of minimum budget to only 100,000 baht.

Jitta is committed to develop our tools services in the future in a bid to give more opportunities for investors to use the efficient tools and services to invest in wonderful companies and potential assets like ETFs, including to gain sustainable returns in a long run.