Graham Rating - Earnings Growth

One of the many qualitative tests in the 17-rule Value Investing framework of Warren Buffett's mentor.

The Earnings Growth rating 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.
Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

The rating displayed on Serenity can be interpreted thus:

100% ⇒ 33% Growth or Earnings 1.33 times that of 10 years ago, 200% ⇒ 66% Growth or Earnings now 1.66 times etc; using 3-year averages.

The 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 Defensive Graham Ratings are 100%.

The years used for calculating the averages are years 0, 1, 2 and years 9, 10, 11 previous to the last fiscal.

Given below is a sample Earnings Growth Rating calculation:

$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)
Earnings Growth Rating = 1.72 ÷ 0.33 = 5.2058 = 520.58% (of the growth rate Graham required)

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