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Growth and Growth Ratios: Trading Pairs

The document discusses different types of growth ratios that are important for equity analysis, including sales growth and income growth. It provides an example of calculating growth rates using revenue, net income, and earnings per share numbers from Walmart's quarterly reports. The key information is how to find these growth numbers yourself using companies' earnings reports and press releases rather than relying solely on websites.

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Liyakath Ali
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54 views2 pages

Growth and Growth Ratios: Trading Pairs

The document discusses different types of growth ratios that are important for equity analysis, including sales growth and income growth. It provides an example of calculating growth rates using revenue, net income, and earnings per share numbers from Walmart's quarterly reports. The key information is how to find these growth numbers yourself using companies' earnings reports and press releases rather than relying solely on websites.

Uploaded by

Liyakath Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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12 TRADING PAIRS

GROWTH AND GROWTH RATIOS

In making you an efficient five-minute equity analyst, it is very important


that we cover growth ratios. Growth numbers are very important in under-
standing where the stock is going, not where it currently is. After all, we
already know that!
There are two types of growth that we will first examine—sales growth
and income growth; both are fairly straightforward. We simply want to know
how much a company is growing and how the individual company stacks up in
its respective sector. If a company had incredible sales growth of 80 percent,
but a negative income growth rate of 10 percent, clearly there is a red flag.
If this scenario were true for a real stock, we could put an “x” in the “bad
income growth” box of our fundamental checklist.
Bottom line: If you are going to buy a stock, we want to see strong
income and sales growth numbers.
Where to find this information? The crux of fundamental analysis is learn-
ing how to be able to do it yourself, which seems much more complicated than
it actually is. When looking for earnings growth, you can do a couple of dif-
ferent things. First, it is important to remember that using any Web site is very
dangerous. The numbers are sporadically updated and can be hardly reliable
at best. Even sites like Yahoo.com can take several days to get updated after
earnings reports. You can’t blame them; you just have to remember to question
every number you come across if you are going to make sure the figures you
are examining are accurate. So let’s figure out how to find these numbers for
yourself. First, the numbers aren’t half as hard to find as you think they are, it
just takes a little research to unearth them. To find earnings growth, I would
like to use the following chart invented by Todd Shaver of BullMarket.com.

Wal-Mart

Quarter 3Q02 3Q03 % Chg


Revenue $56B $63B ⫹13
Net Income $1.8B $2.0B ⫹11
Earnings per Share $0.40 $0.46 ⫹15

This chart is an excerpt from BullMarket.com. The amazing part is that


the numbers are right in front of you in any earnings announcement. Look at
the following Wal-Mart press release that the numbers came from. This is the
actual press release that the company put forth and can be found on any
news service, including Yahoo.com.
Market Basics 13

Press Release Source: Wal-Mart Stores, Inc.


Wal-Mart Reports Record Sales and Earnings
Thursday November 13, 6:43 am ET
BENTONVILLE, Ark., Nov. 13/PRNewswire-FirstCall/—Wal-Mart
Stores, Inc. (NYSE: WMT - News) reported record earnings and sales
for the quarter ended October 31, 2003. Net sales were $62.5 billion, an
increase of 13.1 percent over the similar prior year quarter. Net
income from continuing operations for the quarter was $2.0 billion, a
13.9 percent increase from the $1.8 billion in the similar prior year
quarter. Earnings per share from continuing operations were $0.46
up from $0.40 per share in the same prior year quarter.
Net sales for the nine months ended October 31, 2003, were $181.8
billion, an increase of 11.4 percent over net sales of the similar prior
year period. Net income from continuing operations for the nine
months increased 14.4 percent to a record $6.1 billion or $1.40 earn-
ings per share, up from $5.4 billion or $1.21 earnings per share in the
same prior year period.
On May 23, 2003, Wal-Mart Stores, Inc. completed the sale of
McLane Company, Inc. (“McLane”), then a wholly-owned subsidiary,
to Berkshire Hathaway Inc. McLane has been accounted for as a dis-
continued operation in this release.
Lee Scott, President and CEO said, “The excellent results for the
quarter reflect the continued efforts by our associates to serve our cus-
tomers. Of particular note is the performance of our international and
SAM’S CLUB teams.”

You can see that all we did was take the net income, earnings per share
(EPS), and revenue numbers; round them off; and stick them in the chart.
Thus, we know immediately what the company is predicting without having
to wonder if one of the Web sites that we covet updated their numbers or not.
The issue is that looking at items like the price-to-earnings (PE) ratio
divided by the annual EPS growth (PEG ratio), there is always a discrepancy
of what numbers an analyst Web site is looking at. We can solve this prob-
lem by gathering the numbers ourselves. When looking for forward numbers
like one-year earnings growth, use a Web site like Yahoo.com to get an idea
of the projected analyst estimates. The only question is whether the esti-
mates are correct. However, using a site like Yahoo—and remembering that
there can be errors from time to time—you at least have a reasonable base
to work from.
Figure 3.3 shows the Analyst Estimates page on Yahoo.com.

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