For defensive stocks, the Value Investing framework of Benjamin Graham — Warren Buffett's mentor — required a 33% increase in earnings over the past decade.

## Definition

The *Earnings Growth* rating on *Serenity* is based on the following Graham rule:

5. A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

## Interpretation

The *Earnings Growth* rating on *Serenity* is therefore to be interpreted as follows:

A value of *100%* indicates *33%* growth, or *Earnings* *1.33* times that of 10 years ago. A value of *200%* indicates *66%* growth or *Earnings* now *1.66* times, and so on. The years used for calculating the averages are years *0, 1, 2* and years *9, 10, 11* previous to the last fiscal.

The *Earnings Growth* rating is expressed as a percentage of Graham's requirement — rather than the percentage of growth itself — for the sake of uniformity. A stock is considered fully *Defensive* when all its *Graham Ratings* are *100%*.

Note: Since the upper limit of any earnings growth calculation is theoretically infinite, this rating is capped at *1,000,000.00%*.

### Now 50% (16% Growth)

It may be worth noting that the inflation rate in the 10-year period that Graham wrote the above rule for was about *33%*.

Considering that the inflation rate in the past ten years has been closer to *16%*, an earnings growth of *16%* may be sufficient for a stock to qualify as *Defensive* today. This would correspond to a *Earnings Growth* rating of *50%* on *Serenity*.

## Example

Given below is a sample *Earnings Growth* rating calculation, using three years of *EPS* values each at the beginning and end of the period:

*
$4.06 +
$5.25 +
$4.66
Sum $13.97
*

*
$3.70 +
$1.13 +
$0.31
Sum $5.14
*

*
($13.97 - $5.14) ÷ $5.14 = 1.72 (172% growth)
Rating = 1.72 ÷ 0.33 = 5.2058 = 520.58% (of the growth Graham required)
*