Page 2 - Evaluation continued [3Go
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Historic Analysis -
Go to the menu and
click 'GoTo', then 'Historic Analysis'. This feature is used to "take a look in the rearview
mirror"
at
the data just entered on the Data Entry page. At the top of the page is a brief
description, just below and to the right of this is a pair of Up/Down arrows
adjacent to the number - '11'.
This
label identifies the number of years of data used to calculate the values
displayed on this page. The default value for this label is the total number of years of data that
have
been entered by the user on the Data Entry page. The Up/Down arrow control can
be used to change this setting, eleven being the maximum, and four, the minimum.
Beneath the number of Years
control, is a table of 'Historic Ratios'. The 'High', 'Low', and 'Average'
values are all calculated using the data entered by the user. The ratios under the 'Current' heading use
'Today's Stock Price', if entered on the Data Entry page, otherwise the current ratios are based on the average
Stock price in the
last year of historic data.
The Historic Analysis displays the
results of two different investment techniques. The first, displayed beneath the
label 'Dollar Averaging Purchase Method' uses the Dollar Averaging technique as it's
basis, the second, displayed under the 'Lump Sum Purchase Method' is based
on the Lump Sum technique.
When a dividend paying company is
being analyzed, both the Dollar Averaging and Lump Sum results include two sets
of values. The first reflects the rate of return using dividend reinvestment,
where all dividends issued are used to buy additional shares. The second set of
values is tabulated as though dividends were taken in cash and added to the final dollar
value of the holdings.
In the uppermost frame, the total and
annualized percentile figures displayed are calculated assuming that the same
dollar value of stock has been purchased for each year of history, at the average yearly stock
price. In the lower
frame, the percentile
figures are calculated on the premise that a lump sum of stock was bought at the
average yearly price during the first year of history. If the Stock pays no
dividend, this is the only purchase made. When the Stock does pay a dividend,
either the shares held are increased by the number of shares bought with dividends each year, or the value of the position is increased by the amount
received in cash dividends.
If 'Today's Stock Price' was provided
on the Data Entry page, the present value of the position is calculated by multiplying the number
of shares held times Today's Stock price minus the total amount invested.
Otherwise the Average Stock price from the last year of data is multiplied time
the number of shares held, and the total amount invested is subtracted to
determine present value. If the stock pays a dividend that was
received in cash, this is added to the present value. In the '11 Years' column,
the present value is divided by the average amount invested to arrive at the percentile
value. The values displayed beneath the 'Annual' heading are the actual annualized
compounded rate of return.
The Historic Analysis is a
'what if' look at the actual financial history of the company. They say
"past performance is not necessarily an indication of future results",
but analysis of the past is the best gauge of future possibilities. This is not an
exercise to determine which investment method yields the best return, any Stock
with a history of growth will always do better with the Lump Sum method.
Closing the Historic Analysis page
will return the view to the Data Entry page.
The Studies -
There are four different 'Studies' -
the Stock Price Study, the Sales Study, the Cash Flow Study and the Earnings
Study. The body of each of the Studies is dominated by a graph, but before we examine
these individually, we will first take a
look at the elements the Study's have in common, starting with Controls.
Controls
The tool bar shown below and to the
right, was taken
from the Earnings Study and is similar to the tool bars appearing below the page
menu, and above the graph areas on
the other
three Studies. Starting on the upper left, the first value, labeled '-EPS
Hist. Gwth' (Historic Growth) is the actual average yearly growth rate derived
from the
fundamental data being evaluated in this particular Study. This value can only be
changed by altering the number of years being evaluated and illustrated on the graph.
Directly below the Historic Growth
value and label, is a pair of Up/Down arrows adjacent to the '11 - Yrs of
History' label. By
default, this
value will start at the maximum number of years that can be displayed,
but can be lowered by clicking the down arrow.
When the number of
years is changed you will note that the Historic Growth rate has also changes to
reflect the average growth rate for the number of years selected. By using the arrows, the number of
years can be changed back to the maximum, or can be lowered to a minimum of four
years.
Moving to the right, the next control
also addresses a Growth rate. This is the Growth rate that is applied to the
Trend Line, on the graph
below (to be covered later under Graph Elements). To the right of the red label; 'Growth'
is a text box, located above a command button labeled 'Redraw'.
Adjacent to this grouping, is a pair of Up/Down arrows. When a Study is first opened, the default
Growth rate appearing in the text box is the Historic Growth rate. This value can be changed two different ways. First, the growth
rate appearing in the text box can be changed by clicking inside the box and
changing the text, this is the preferred method when a substantial change is
desired. When the text box is changed, the 'Redraw'
label on the command button will change to red with a yellow underline, as shown
on the tool bar example above. This label change occurs to let the
user know, that to implement the change, the 'Redraw' button needs to be clicked.
This action will redraw the graph to reflect the revised Growth rate. The Growth rate
value can also be changed incrementally, using the Up/Down arrow control to the right of
the text box. When using this second method the graph is automatically redrawn
using the revised growth rate.
The next control is the Centering
command button that appears in the tool bar example above or below, as a letter 'C'
with the letter 'L' over laid and
centered on it. This
control will be examined more intensely when the 'Trend Line' is discussed in the Graph Elements
section.
To the right of the Centering command
button are labels describing the purpose of the Up/Down arrows located a bit
further to the right. As the label indicates, these arrows are used to 
raise or
lower the Trend Line on the graph. Like the 'Trend Line', the implications of this control will be discussed in detail
in the Graph
Elements section.
The next grouping of controls, consist of the label '2', adjacent to another set of Up/Down arrows, beneath the initials 'MA'. These
are the Moving Average controls, the default value for this control is one. The most
common use of Moving Averages is to help smooth out graphs that
are erratic, making it easier to discern the general trend. Equity Evaluator
also uses Moving Averages for another purpose - to eliminate any zeros or
negative numbers in the fundamental data being graphed. Which
brings us to the next control - Graph Type. The preferred, and default Graph
Type used in this program is the logarithmic graph. Only positive values can be
converted into logarithms, so when the program comes across a zero or
negative number in the data being graphed, it will use the Moving Average to try to
average out any values that are not positive. Clicking the
command button labeled 'Logarithmic' will toggle to the 'Arithmetic' Graph
Type, altering the command button label to reflect the change. The differences between these two types of graph will be
discussed in detail in the Graph Elements section of this web.
The command button to the right of
the Graph Type control shows a magnifying glass examining plus and minus
symbols. The graph area in both the Cash Flow and Earnings Studies are divided
into two separate graphs. When this control is clicked the active graph will be
enlarged to fill the entire graph area, a second click will return to the
display of the original two graphs.
The last control, on the far
right, has a label that resembles a crystal ball containing a dollar sign and
a question mark. Clicking on this control will open the Future Projections
page for the Study. A section is devoted to this feature in another area of the
website.
All
control settings that have been changed by the user will retain the new settings
if the file is saved, and will return to the new settings if revisited prior to
saving the file, but before closing the file.
Graph Elements
The four graphic Studies - Stock Price, Sales, Cash Flow,
and Earnings are the primary means of evaluating a Stock's potential. The
dominant graphic elements in all four of the Studies are:
Graph Type
The previous
section on Controls touched on Graph Type only long enough to recognize that two
types can be used in Equity Evaluator - Logarithmic and Arithmetic. 
Pictured
below are the vertical scales from each of these Graph Types; the Logarithmic,
or Log scale on the left, and the Arithmetic scale on the right. The essential
difference between the two graphs is the scale measurement. The Arithmetic scale is used to measure
absolute change. A unit of measure is represented by the same distance
regardless of where it falls on the scale. The Logarithmic scale on the other
hand is used to measure percentile change. On this scale, the distance representing a unit of
measure varies according to the location on the scale and the total number of
units. Most people are familiar with the Arithmetic scale on the right, which
measures absolute change. On this scale the distance between 10 and 20 is twice
the distance as the space between 5 and 10 , the former represents an
absolute difference of ten, and the later representing an
absolute difference of five, or half of ten. Examining the
same values on the Logarithmic scale to the left, reveals that the distance
between 10 and 20 is the same as the distance between 5 and 10. This is because
a Log scale measures percentile difference, and the percentile difference between 10
and 20 is 100%, the same as the percentile difference between 5 and 10.
When evaluating Stocks to be held for
the long term, growth is the determining factor and a Logarithmic graph is ideal
for illustrating compounded growth rates. Plotting a consistent growth
rate of twenty percent on an Arithmetic graph appears as an
upwardly curving line that becomes progressively steeper, as shown on the
right hand graph below. Plot the same data on a Logarithmic graph, and the
consistent twenty percent growth
rate is plotted as a straight line, as pictured on the graph below favoring the
left edge of the page. Using an
Arithmetic scale, a growth rate that starts out
high, but then decreases progressively, does not appear discernibly different than the Arithmetic graph
below. The same progressively decreasing growth rate when
plotted on a Log graph creates a downward curving line that becomes
progressively steeper.
This attribute is invaluable
when looking for Stocks with
consistent or increasing rates of growth. A secondary reason for using
Logarithmic graphs is the first impression given by a growth stock on an
Arithmetic graph. If the growth rate is considerable, the resultant steepness in
the graph line looks unsustainable, sometimes even scary. This is a
psychological barrier resulting from the method of graphing and may not reflect the
future potential of the Stock being evaluated.
Note for the technically oriented:
The 'Logarithmic' graph setting on Equity Evaluator, utilizes a semi-logarithmic
graph, as the vertical scale is
Logarithmic, the horizontal scale Arithmetic.
When searching to uncover Stocks with the potential for sustainable growth in the
future, the Logarithmic graph, designed to illustrate compounded growth, is by all
means the preferred Graph Type.