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S2O Stock Analyzer Tutorials: Growth Grade and Financial Ratios

type: video (mp4); length: 5:09; watch on YouTube.

Demonstrates how to use Growth Grade & Financial Ratios section; shows the difference between historical and year-over-year Growth Grade on the real life example.

Transcript

In this video we are going to talk about the growth grades and financial ratios section of the Stock Analyzer. Just like in the previous video we are going to stick with Apple as an example.

Important Ratios are in the left section

As you can see there are several important ratios shown in the left section. It is quite useful because no matter what details are loaded on the screen, I can always see the major ratios and it is usually enough to see just them. We have here:

  • Both Growth Grades (historical and year-over-year) - gives you a sense of how fast and how stable the growing is
  • Long Term Debt to Free Cash Flow Ratio - shows how much debt a company has
  • Return on Invested Capital
  • Beta - measures stock price volatility. If Beta equals 1 that means that stock is as volatile as the market and if it is greater than 1 - stock is more volatile.
  • PEG and PEGY - stock2own shows trailing values for price to earnings to growth (PEG) and PEGY, which is the same as PEG but includes dividend payments. Price/Earnings To Growth and Dividend Yield (PEGY) Ratio may be an even better measure than PEG for stocks that pay a substantial dividend. When PEG or PEGY is equal to 1 the stock is considered to be fairly priced; if it is greater than 1 - overpriced; lower the 1 - underpriced.
Most ratio values are highlighted

Of course, all these ratios as well as a bunch of others, are shown on a detailed page. Each ratio has a brief description, which is applicable to its current value.

Most ratio values are highlighted using a green background color to show that the value is considered to be bullish and red background to show it's value is bearish.

For example, if Beta is 1 or below (means that stock is less volatile than the rest of the market), background color for Beta would be green; otherwise - red.

However, not all ratios are highlighted. For instance, Price to Earnings (PE) or Earnings per share (EPS) will always have a gray background, because there is no generally accepted value to compare with.

If you forget what a certain ratio means or how to interpret it, just click on the question mark icon next to this ratio and the definition will be shown in a small popup window. When you want to close it, simply click on the question mark again and the popup will go away.

Growth Grades

Two ratios that I always pay attention to are historical and year-over-year Growth Grades.

Growth Grade is based on growth rates. It weights each growth rate for five major financial metrics (Equity, EPS, Sales, Free Cash Flow, Cash from Operating Activity and ROIC), using the stock2own proprietary formula. Growth Grade is a decimal value between 0 and 100, where 100 is the greatest grade. The decimal value of a growth grade often is also shown as a simple grade: A+ is the best grade, F is the worst.

Both Grades are shown as buttons. Click on it and you will see the underlying growth grades.

  • Historical Growth Grade is based on historical growth rates and gives you a sense of how fast the company is growing.
  • Year-over-year Growth Grade is based on year over year growth and shows how consistent the growth is.

So, growth rates in those windows are different, even if the screens look very similar.

Are Growth Grades in sync?

When I analyze a stock I like to see both grades in sync. If they are not, I check underlying growth rates and want to understand WHEN the change has happened. If it happened a few years ago, most likely the change has been incorporated into the price already. However, if the change is relatively recent, a stock may be in an early reversal stage, which gives an opportunity of early entry. Sometimes historical growth rates may even hide some issues.

Historical Growth Rate is always calculated as a historical value compared to most recent value. For example, 1 year growth is a growth between a value 1 year ago and the most recent value; 5 year growth is a growth between a value 5 years ago and the most recent value. Therefore, if the most recent value becomes higher than in all previous years, you can see that ALL historical growth rates will become positive, even if data for just one year was added.

We can see this scenario for Allegiant Travel company (symbol ALGT).

Historical Growth Grade for ALGT is A+, but year over year grade is only a C. The answer is quite simple - 2012 was a very good year for the company and this is the latest year available, so all historical growth rates will be calculated against 2012 numbers. It hides all problems the company had in a previous years.

So if you compare historical and year over year rates, you can see many more red cells in the growth rates table for year over year growth. Let's check just one of them - EPS.

When I open annual statements, I can see that EPS was very low (1.1%) in 2009 and in the next two years - 2010 and 2011 - it was falling by 11 and 22 percent correspondingly. Quite a big drop and definitely not a good sign. It is reflected in a lower value of year-over-year grade.

Another interesting application is to use both grades to find stocks that are reversing their direction. In other words, if you see that historical grade is not the same as year over year value, check underlying growth rates and financial statements and see if the stock is in an early stage of reversal. It may give you a good entry point especially if confirmed by low price to book value ratio and supported by strong numbers for the latest year and quarters.

Thank you.