The front of the TSSW deals only with the Quality issues: Growth and Efficiency.
Growth Chart
Probably the most important item on this form is the graph that occupies the largest space in the Growth section. Here, you can see at a glance just about all you need to know about the quality of the company.
The top (green) line plots the company's annual sales/revenues; the middle line (magenta), its annual profits (before taxes); and the bottom line (blue) plots annual earnings per share. The little boxes represent the average number of shares outstanding each year.
A "growth chart" is different from conventional graphs since it's designed to show rates of change as straight lines. Changes in the rate of growth show up any time a line connecting the plotted points changes direction.
Therefore, if the lines are fairly straight and slope up at a good rate, the company is probably a good candidate for study. If they're very crooked and/or don't slope up very much or at all, it's most likely not.
Predictability is measured by the straightness of the lines; strength is assessed by the steepness of their slope. Both of these criteria are measured by the program and reported on the Growth analysis screen.
The actual rates of sales and earnings growth are displayed to the right of the growth chart along with the ratings for stability. Beneath those are shown the forecast rates of growth—fields which are colored yellow, indicating that an advanced user can override that information and insert his or her own estimates.
Recent growth, also reported on the Growth Analysis screen, can be found in the lower right corners of the Quarterly Sales and Quarterly Earnings tabulations, just above the graph. These figures represent the growth between the sum of the last four quarters of each and the same data from the year before. Unless you're an advanced investor and are comfortable assessing the reasons for the change, it's best to stay away from a company whose recent performance doesn't meet the requirements for growth.
Efficiency
Although the Technamental Stock Study Worksheet doesn't label it as such, the two small graphs on the right side of the page deal with efficiency and depict profit margins and return on equity. These are the issues that are covered in the Efficiency analysis screen.
Profit Margins that increase or are steady are desirable. Declining margins are not. The horizontal line across the chart shows the average of all of the years displayed; and, it's easy to see at a glance if the most recent values are above or below average. If they're below, the trend is down.
Return on Equity is of somewhat less concern since it deals with resources that are used to fund longer-term decisions, the consequences of which won't show up until some time in the future. Then, they'll show up in the profit margins
We are, however, somewhat concerned if the return management achieves on the shareholders' capital investment is below what we look for as a minimum value for growth. If this is the case, it indicates that, unless the company borrows money or acquires another company or takes some other step, it will likely be unable to continue the growth needed to make it a good investment. However, this is an infrequent occurrence; and there are many things that can cause this that are not necessarily bad.
The Business Model
The bottom section on the front of the TSSW is an area where future growth and future earnings are calculated. Using the forecast earnings growth rate, it's quite simple for the computer to calculate what earnings would be in five years at that rate of growth.
As a "second opinion" or a way to corroborate that estimate, the business model starts with sales, the more stable statistic (because it's unaffected by expense items, taxes, or the number of shares among which the profits are divided.). It then allows you to examine and, if you're an advanced user, change with good reason the values that affect the income as it makes its way from the top line (sales) to the bottom line (earnings per share).
The sales figure is first multiplied by the average profit margin to get pre-tax profit. If the advanced user has a good reason to alter that figure—say margins had increased regularly and strongly over the last couple of years—he or she might want to use a more current figure.
Next, the taxes are deducted at the default rate (the most recent year's tax rate). Again, this can be amended by the advanced user if there's a good reason to do so.
Any adjustments may then be deducted—the most common being any preferred dividends the company is committed to paying.
And finally, the result is divided by the number of shares outstanding, which may also be amended for good reason. This result is your second estimate of the future earnings per share.
Take Stock displays the results of both methods of estimating future earnings; and the user has the option of selecting which to use—usually the more conservative of the two.