The Earnings Growth criteria in the Value Investing framework of Benjamin Graham — Warren Buffett's mentor — require adjustment for Inflation.
Definition
The Earnings Growth rating on GrahamValue 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 GrahamValue 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%.
The years used for calculating the averages are the fiscal years 0, 1, 2 and 9, 10, 11 previous.
The Earnings Growth rating on GrahamValue 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.
Note: Since the upper limit of any Earnings Growth calculation is theoretically infinite, this rating is capped at 1,000,000.00%.
Inflation Adjustment
It may be worth noting that the Inflation rate in the U.S. in the 10-year period that Graham wrote the above rule for was about 33%.
The CPI Inflation Calculator by the U.S. Bureau of Labor Statistics yields an increase in the Consumer Price Index (CPI) closer to 25% for the decade 2012-2022.
Therefore, an Earnings Growth of 25% may be sufficient for a stock to qualify as Defensive today. This would correspond to a Earnings Growth rating of 75% on GrahamValue.
Note: Non-U.S. economies such as the U.K. may also require an Earnings Growth rating of 75% as of 2022.
Filter Calculator
The below JavaScript calculator can be used to automate the Filter or Rating calculation.
Inflation Rate / Earnings Growth (%)
Filter Value / Growth Rating (%)
Example
Given below is an Earnings Growth rating calculation using the 2015 values of Universal Corp (UVV), using three years of EPS values each at the beginning and end of the period.
E00 = $3.70
E01 = $1.13
E02 =$0.31
Sum01 = $5.14
E09 = $4.06
E10 = $5.25
E11 = $4.66
Sum10 = $13.97
Growth = (Sum10 - Sum01) ÷ Sum01 = ($13.97 - $5.14) ÷ $5.14 = 1.72 = 172%
Note: The averaging of the sums (÷3) will cancel out from the above division, and so is not used here.
Growth Rating = 1.72 ÷ 0.33 = 5.2058 = 520.58%
Watch Video
Growth = Value
At the 2000 Berkshire Hathaway Annual Shareholders Meeting, Warren Buffett explained that there is no distinction between Growth and Value stocks.
"But there is no distinction in our minds between growth and value. Every business we look at as being a value proposition. The potential for growth and the likelihood of good economics being attached to that growth are part of the equation in evaluation.
Submitted by GrahamValue. Created on Friday 5th February 2016. Updated on Friday 19th August 2022.
Comments
Inflation for 10 year
Inflation for 10 year earnings growth from 2013 to 2023, which now looks like 32.49% to me, is what I did right? The US Consumer Price Index was used
How do I set the filter to Saudi Arabia? Thank you
Filter Calculator Above
Dear Omar_H,
Thank you for your comment!
32% looks about right. Using the month of July for both years of the decade, in the U.S. Inflation Calculator linked to above, appears to yield approximately 31%.
The official government link for Inflation in Saudi Arabia does not appear to have a calculator. But commercial calculators yield an Inflation rate of about 18% for Saudi Arabia in the same period.
Entering 18% in the above Filter Calculator yields a filter value of 55%.
Thank you again for your comment!