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Thoughts from Ralph Seger on this topic.

SSG Visual Analysis

This SSG Visual Analysis graph is the first step toward helping you identify a quality growth company.  You're looking for a company that has a track record of consistent growth in sales, pre-tax profit, and earnings.  This is evaluated using the historical (left) portion of the SSG Visual Analysis graph.

Historical Trends and the Income Statement

On the historical portion of the SSG Visual Analysis graph you're really looking at an overview of past company income statements.  (To learn more about the income statement, click here.)  The figure below shows an example graph of company expenses, taxes and earnings from past income statements (the vertical bars) along with the corresponding trends in sales, PTP (pre-tax profit) and earnings (the lines curving upwards).  Note that sales is equal to expenses, taxes and earnings added together.  Also, at this point, we're talking about earnings, not earning per share (EPS).

The data on the graph above represents a (hypothetical) company where sales, PTP and earnings are all growing approximately 15% each year.  Each year, each amount is about 15% larger than the year before.  At this level of growth, sales, PTP and earnings will each double in five years.  You can see that on the graph above by comparing year 1995 with year 2000.  Earning grew from 100 to 200, PTP grew from 143 to 286 (OK, that's harder to see!) and sales grew from 400 to 800.

In a real company those numbers might represent millions or tens of millions of dollars, so "100" might represent 100 million dollars or perhaps 1 billion dollars.  Note that PTP of 143 compared to sales of 400 means that this hypothetical company is able to retain about 36% of each sales dollar as pre-tax profit, which is very a healthy profit margin (143 / 400 = 35.8%).

On the graph above it's pretty easy to see that things are growing over time.  Each of the lines representing sales, PTP and earnings move higher in more recent years.  (And, of course, the corresponding bars representing expenses, taxes and earnings get taller each year.)

However, it's quite hard to answer two very important questions by looking at that graph.  First, is the amount of growth each year (the growth rate) fairly consistent?  Second, are the growth rates for sales, PTP and earnings fairly similar?  In this example, all three (sales, PTP and earnings) are growing by exactly the same percentage from one year to the next, but you can't determine that from a quick glance at the graph.

As shown on the graph below, the SSG Visual Analysis graph is one way to answer those two important questions more easily.  Both the graph above and the graph below are showing exactly the same values for sales, PTP and earnings.  They're just showing them in different ways.

This new graph shows the data in a special way so that a consistent growth rate shows up as a straight line.  In addition, lines anywhere on the graph with the same growth rate will be parallel.

So, it's now easy to see that sales, PTP and earnings are each growing consistently, because each of these lines is straight (and moving higher on the graph from left to right).  It's also easier to see that sales, PTP and earnings are all growing at the same rate, because all three lines look parallel (in this example they're exactly parallel).  Now you know why the SSG Visual Analysis graph looks the way it does!

Potential for Future Growth

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