The graph in succession the front ...

The graph in succession the front of the Stock Selection Guide is used to start an analysis of a stock according to focusing on its "growth" and "quality" characteristics. These characteristics are many times readily apparent after simply plotting a stock's incomes and earnings per share (EPS) forward special graph paper called "semi-log graph paper," or more descriptively, a "growth chart."

Like regular graph paper, a germination chart has vertical lines that are spaced equally apart. It's the horizontal lines that are a bit different. The Guide's horizontal lines have systematic, rough spacing. It's this special spacing that gives the increase chart its power. The chart impediments you estimate an annual commute rate of growth without resorting to mathematics. In addition, it allows you to plan very large numbers (like a company's annual revenues) and to a high degree small numbers (like a company's EPS) in succession the same graph.

GETTING STARTED

You ne at least five to 10 years of return and EPS data to plan on the graph. These data may be available in the historical summary section of the company's chiefly recent annual report or in a financial database so as the Guide Data Base.

As with any graph, before you can start plotting, you must first establish a numbering scheme for the vertical and horizontal lines. This article will explain a simple rule for numbering the lines onward a growth chart.

NUMBERING THE VERTICAL LINES

You start numbering the vertical lines by dint of assigning a number to the 10th vertical line from the left You'll notice that this line is somewhat thicker than the other vertical lines forward the Guide.

Usually, the number assigned to the 10th vertical line is the latest complet fiscal year for which the company has disclosed financial statements. However, near the cessation of a company's fiscal year, the latest available full-year data is getting a bit elderly When a company is at or nearing its fiscal year-end, it is ofttimes useful to calculate an estimate of the passing from hand to hand year's revenues and EPS based forward the financial information disclosed for the first three quarters of the passing from hand to hand year. For example, at the time of completing the Guides for the sum of two units "Stocks to Study" in this issue of Canadian Shareowner (Colgate-Palmolive and Gennum) the two had reported results for their mostly recent fiscal year-end which occurr in 1993 However, since the pair companies were at or near the extreme point of their fiscal year, the Guides were complet using estimates for 1994 returns and EPS. Accordingly, the 10th vertical line forward both Guides is labelled "1994" in the space provided.

Once the 10th vertical line has been labelled, the dates assigned to the other vertical lines are automatically plant (see Figure 1). In situations where 10 years of historical data are not available, a certain quantity of of the left-most vertical lines will remain unnumbered.

NUMBERING THE HORIZONTAL LINES

The number-labels already provided for a certain number of horizontal lines on the chart are a helpful relation when assigning your own numbering scheme to the lines.

To begin, you must first assign an appropriate number to horizontal line labelled "1" You can assign any value to this line leave out zero or a negative number. one time a value has been assigned to the line labelled "1" the value of all other horizontal lines is automatically set! Line "2" is automatically defined at a value 2 times greater than the value assigned to line "1" Similarly, line "10" is automatically defined as having a value 10 times greater than the value assigned to line "1"

For example, when plotting incomes the line labelled "1" might be assigned a value of $10M That means the line labelled "2" would be assigned the value of $20M (2 X $10M) Similarly, line "10" would be assigned the value of $100M (10 X $10M) and the line labelled "100" would be assigned the value of $1000M or $1B (100 X $10M)

When plotting EP the line labelled "1" might be assigned the value of $010 in the way that line "2" would automatically be put at $0.20 and line "10" would automatically be place at $1.00, and so on

Examples of alternate numbering schemes for the horizontal lines can be seen in the Stock Selection Manual (page 13)

Unlabelled lines

The unlabelled lines in succession the Guide are also defined automatically one time a value has been assigned to line "1"

You'll notice in succession the Guide that the number of increments between labelled lines varies. Sometimes there are 10 increments (as is the case between lines "1" and "2") and sometimes there are single five increments (as is the case between lines "9" and "10") The unlabelled lines are assigned values accordingly.

For example, if line "1" were assigned a value of $10M the values assigned to the unlabelled lines between lines "1" and "2" and between lines "9" and "10" are illustrated in Figure 2

AN "APPROPRIATE" VALUE FOR LINE "1"

If you're not careful with your numbering scheme, the income and EPS data can actually earn intermingled on the growth chart. This can create about confusion. Generally, you should put to the test to assign values to line "1" in such a manner that the revenue data is plott above the EP data. In addition to keeping your graph neat, plotting the lines in this order is consistent with companies' income statements...where income data appear at the top, and earnings data appear at the boom