Fundamental Analysis: Growth Grade

Fundamental Analysis: Growth Grade

Growth Grade

Growth Grade is a decimal value between 0 and 100, where 100 is a 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.

Growth Grade is based on historical or year-over-year growth rates. It weights each growth rate for five major financial metrics (Equity, EPS, Sales, Free Cash Flow, Cash from Operating Activity and ROIC) and year, using stock2own proprietary formula.

Growth Grade algorithm recognizes when and how big the negative growth happened and adjust grade accordingly. For example, if 10 year ago Equity growth of a business was negative, company will NOT get a "bad" rating, simply because there is a red cell in a Growth Rates table.

Stock2own computes two 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 (YOY Growth Grade) is based on year over year growth and shows how consistent the growth is.

Explanation

At its essence, Growth Grade is stock2own's way to compress historical or year-over-year growth rates for last 10 years into just one grade (number). In other words, convert this

Growth Grade and Rates

into this:

B (77.55)

Why there are two grades?

The short answer is because of the nature of the historical growth computations.

Let's take a close look at how do we calculate historical Growth Rate.

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 most recent value; 5 year growth is a growth between a value 5 years ago and most recent value. Therefore, if most recent value become lower than in all previous years, you can see that ALL historical growth rates will become negative, even if data for just one year was added.

In order to overcome the described effect of usage of historical growth, we maintain "Year-over-year" growth grade, which computes not historical but year-over-year growth rates. It is much smoother than historical, it allows you to view data in a slightly different angle and see how consistent the growth is.

One growth grade is not better than the other, together they give you a complete look on the company’s financial position. Remember,

  • Historical Growth Grade gives you a sense of how fast the company is growing.
  • Year-over-year Growth Grade (YOY Growth Grade) shows how consistent the growth is.