VG Growth model

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ValueGain Growth Model

The ValueGain Growth Model seeks to find companies with the potential to not only grow earnings but to sustain that growth. In doing so these companies will increase their own net worth which will translate into capital appreciation.

Ideally such companies should have projected earnings growth rates for the next 5 years of at least 15%.

The ValueGain Growth Model also looks for companies that can improve their efficiency by growing their pre-tax margin while growing sales.

In addition there is a requirement for such companies to maintain or grow the return on equity.

Analysis / Calculation

The following are some of the criteria used in the Intelligent Investor analysis:

The four relevant criteria are:

Sufficient EPS Growth

Long term EPS Growth indicates that the company is growing over time. The ValueGain Growth Model aligns EPS Growth with the size of the company.

  • Large companies should have EPS Growth of at least 5%.
  • Medium size companies should have EPS Growth of at least 7%
  • Small companies need to have EPS Growth of 12% or more.

A PASS indicates a stock that has sufficient EPS Growth for its size.

A FAIL indicates that a stock does not have sufficient EPS Growth according to the ValueGain Growth Model principles..

Stable or Positive Forward Earnings Growth

To ensure that growth going forward is likely to be reasonable, the 5 year forecast EPS Growth rate is compared to the historical rate.

The ValueGain Growth Model aligns the required EPS Growth to the size of the company.

  • Large companies should have EPS Growth of at least 5%.
  • Medium size companies should have EPS Growth of at least 7%
  • Small companies need to have EPS Growth of 12% or more.

A PASS rating is given if the stock's 5 year average Forecast EPS Growth rate is the same or greater than the historical figure.

A FAIL is given to the stock is the 5 year average Forecast EPS Growth rate is expected to be less than the Historical EPS Growth rate.

Positive Pre-Tax Profit margin

The Pre-tax Profit Margin is calculated by taking net profit before taxes and dividing it by net sales. The pre-tax profit margin is used to avoid distortions that may be caused by taxes.

A decreasing margin may indicate that the company is encountering difficulty, perhaps because of rising costs or increased competition.

A growing Pre-tax Profit Margin may indicate that the company is growing sales while at the same time maintaining or improving efficiency.

A PASS is given if the stock's Pre-tax Profit Margin is at least equal to its own 5 year average Pre-tax Profit Margin or the industry average pre-tax profit margin.

A FAIL is given if the stock's Pre-tax Profit Margin is less than both its 5 year average Pre-tax Profit Margin and that of the sector.

Stable ROE

Return on Equity (ROE) measures the return on shareholders funds or shareholders equity.

ROE is calculated by dividing the net profit by shareholder equity and multiplying it by 100 to express the result as a percentage. The higher the ROE the better.

A PASS is given if the stock's ROE is at least equal to its own 5-year average ROE or the sector average ROE.

A FAIL is given if the stock's ROE is less than both its 5-year average ROE and that of the sector.

Reasonable Earnings Growth

To ensure that earnings are growing at a reasonable rate the ValueGain Growth model looks for companies where the 5 year average EPS Growth rate is at least 15%.

A PASS is given if the stock's 5 year average EPS Growth rate is 15% or more.

A FAIL is given if the earnings are expected to grow at a lower rate on average over the next 5 years.

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