The High EP (earnings by share) est...

The High EP (earnings by share) estimate in five years is the same of the key elements destitutioned to calculate the estimated High Price in five years-which is required to identify a stock's "Buy Zone"

In order to estimate a High EP in five years, investors must make common-senses about a company's potential for what is yet to be growth first in revenues and then in EP one time reasonable future growth rates are estimated, trendlines for subsequent time growth in revenues and EP are drawn public five years into the events to come The point where the that will be EPS trendline meets the right-most vertical line upon the Guide is the estimated High EP in five years.

Throughout this article, Newbridge Networks, featured as a "Stock to Study" forward page 18, is used to illustrate the practice for projecting future growth.

PROJECTING hereafter REVENUE GROWTH

In the last issue, "Inside the Guide" (September) awaited at projecting revenue growth into the future

When judging the rate at which to advance future revenues, the default sense is often to use the average historical bourgeoning rate over the study period--unless there is an indication that this rate might bear a significant change.

Newbridge experienced consistent, positive germination at an average compound rate of 65% (calculated using the mid-point method--see the Stock Selection Manual for details) above its nine-year study period. This rate is unusually high and unlikely to be sustained from one side of to the other the long term. In addition, the CSA's Guidelines for conclusion (see page 23) suggest that it is unusual to make progress revenues at more than 20% for a period as extended as five years. This constraint has been invoked for projecting Newbridge's coming events revenues over the next five years.

PROJECTING events to come EPS GROWTH

Newbridge's EPS athwart the study period grew at an average annual compose rate of 75% (calculated using the mid-point method) Although the default sentence would normally be to advance future EPS at the historical rate, there are several characteristics of Newbridge's historical record that could lead an investor to plot slower growth. Some of these are discussed here.

Quality of Historical extension in EPS

Consistency

For extension stocks, quality historical growth in EP is illustrated forward the front of the Guide from a reasonably straight line (few peaks and troughs) with a significant positive obliquity This type of line indicates that management has been growing EP fortunately over the study period.

Newbridge's EP line for the last four years has been excessively steep and consistent--indicating good quality germination However, in the early years of the meditation period, Newbridge experienced lower quality, erratic EP shooting In 1987, 1988 and 1991 EP development was negative, dipping off the Guide's chart. Although common or two years where shooting declines temporarily do not necessarily indicate a question investors should take note of the bad years and find abroad what happened to cause the decline. single can contact a broker or review the company's annual reports to learn if the poor performance was caused by way of a one-time event or simply poor management.

In the case of Newbridge, the poor performance in 1987 and 1988 was proper to the fact that the company's main product--time divisional multiplexers (TDMs)--only began to lay open a significant market in 1988 one time sales of TDMs took facing so did EPS. In addition, these years occurr far enough in the past that they are of little consequence--especially in light of Newbridge's of the best performance in more recent years. Newbridge's negative EP number in 1991 was befitting in large part, to the powers of the last recession.

EP Tracking Revenues

When assessing the quality of EP bourgeoning on the Guide, it is also useful to note the amplitude to which the EPS line "tracks," or determines consistently with the revenue line. Ideally, as a company shoots revenues, EPS should grow at a similar rate.

In the early years of Newbridge's inquiry period, revenue growth was reasonably consistent, while EP germination was quite erratic. However, in the last not many years, the EPS line has tracked the return line much more closely.

Variations in putting out Rates

When reviewing a stock's historical vegetation it is useful to compare the overall growing rate to growth over the last not many years ("recent results") and the last not many quarters ("current results"). If these putting out rates are higher or lower than the historical rate from one side of to the other the entire study period, investors might be inclined to devise growth at something other than the historical rate.

Since Newbridge's meditation period is only nine years, the last four fiscal years were used to calculate the newly come results--growth at an average annual pay with an abatement rate of 126% (calculated using the increase Formula*. This represents a significant increase from the nine-year bourgeoning rate of 75. However, development between fiscal years 1994 and 1995 (Newbridge's fiscal year-end is in April) barbarous to an average annual unite rate of 18%. In addition, in every one's mouth results show year-over-year growth between the in first quarter of fiscal year 1995 and the first quarter of fiscal year 1996 to be negative (-10%)