BI wiki

Hits:

Top Ten Pages

Graphics courtesy Ellis Traub's book, Take Stock.

For more detailed info about the book, click here.

You remember what our ideal stock looks like, right?

Sometimes the lines are not parallel.  That tells us a lot too.

When sales, pre-tax profit, and EPS are plotted in this order they represent an income statement. The visual analysis is then a 10 year look at how these items have changed.

Less commonly known are what the spaces between the lines represent.

Click here to review the basic format of an income statement.

Look at the figure below. There are two spaces we can consider. The space between sales and pre-tax profit represents the expenses incurred by the company, and the space between the pre-tax profit and EPS represents taxes and the number of shares outstanding.

Thinking of the spaces this way lets you directly understand what's happening in the company over time.

For example, if the expenses space gets larger, expenses got larger. If the taxes-share outstanding space gets larger, then one or both of these items got larger. The same is true if the space gets smaller.

One other piece of information is useful. When expenses change, your pre-tax profit margin goes in the opposite direction. Think of it as a see-saw. Expenses up, profit margin down and vice versa.

Let's consider two situations encountered if one of these spaces changes at a rate different than the other two.

Sales growing faster than EPS and EPS growing faster than Sales.

You can analyze the cause of these by noting the relationship between the Pre-tax profit line (represented by a dotted line in the figure below) to either sales or EPS.

A couple of examples are shown below.

Consider another situation encountered on the visual analysis: Sales parallel to EPS, but pre-tax profit not parallel to either.

A case where both spaces are changing.

Here you simply look at which spaces are changing.

In the below sample you can see the expenses space is getting smaller while the taxes-sharesoutstanding space is getting larger.

Remember the see-saw? As expenses get smaller, profit margins go up. So profit margins improved while either the taxes, shares outstanding, or both got larger so that sales remained parallel to EPS.

So far we've looked at straight line, but things aren't always so simple in the real world.

Consider the company below. The lines are not straight.

The initial trend is for expenses to become less, but recently they have begun to increase.

Remember the see-saw.

Profit margins initially increased and recently began to decrease.

The taxes-shares outstanding space initially increased and has stabilized recently.

Initially either taxes, shares outstanding, or both increased, but recently they have remained constant.