The largest peak-to-trough decline in stock price over the past year. Drawdowns beyond 30% often take years to recover from. Compare to market drawdowns during the same period to assess whether the decline was company-specific.
Formula
Description
The largest percentage decline from a peak price to a subsequent trough within the past year. This measures downside risk in a way that volatility statistics can miss. Large drawdowns are psychologically difficult to endure and can trigger forced selling by leveraged investors.
Interpretation
Ideally above -20% (meaning the worst decline was less than 20%). Drawdowns beyond -30% often take years to recover. Compare to market drawdowns during the same period to determine if the decline was stock-specific or market-wide.
Related Risk Indicators
Whether gross margins are improving or declining over five years. A positive trend means the company is gaining pricing power or reducing costs. Negative trends in a mature business are a warning sign.
Whether bottom-line profitability is improving or declining over five years. A positive trend indicates the business is becoming more profitable. The most durable improvement comes from expanding gross margins rather than cost-cutting.
The lowest ROIC recorded over five years. A company with a high minimum ROIC (above 10%) maintains strong returns even in bad years, indicating a genuinely strong business with a durable competitive advantage.
Measures the accrual component of earnings relative to total assets. When cash flow exceeds reported earnings, the company has high-quality earnings. Large accruals relative to assets are a red flag for potential manipulation.
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