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Thoughts from Ralph Seger on this topic.

Evaluating Management's Efficiency

Please remember the SSG is a progressive form. This means you won't be looking at section two until you are satisified with the growth you've already seen in section 1, the visual analysis.

When interpreting this section you should remember these results were achieved while the company's management grew sales, pre-tax profit, & EPS at acceptable rates of growth and consistency.

The SSG uses two methods of evaluating management's efficiency.

Pre-tax Profit Margin

The first measure of management's efficiency is the % earned on sales or pre-tax profit margin.

This measures how efficienctly management was able to convert sales into profit.

In other words, for every dollar of sales, how many cents were produced for profit.

Look at the size of the number and the trend of the numbers.

We're looking for an even or upward trend to the numbers. With these cases we have the possibility of EPS growing at the same rate or faster than sales.

A downward trend will make it more difficult or impossible for EPS to grow as fast as sales.

The numbers are industry specific so be sure to compare them to an industry average or to a few of their competitor's numbers. You might just find a better company to buy!

Return on Equity

The second measure of management's efficiency is % earned on book value or return on equity. (ROE)

This measures management's ability to efficiently generate a return on the dollars shareholders have entrusted to the company's management.

Think of this as: "For every dollar the shareholder has entrusted to the company's management, how many cents were management able to return for using this money?"

We also look at the values  and trends of these numbers.

NAIC mentions the best companies will have values in the 15% range.

We look for an even or upward trend here also.

Be sure to compare the numbers to an industry average or to a few competitor's numbers.

Click here for a discussion of the components of ROE.

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