The Annual Rates of Change box, or more simply put, the Annual Rates box, is located in the left-hand column of the standard Value Line Investment Survey page. This box shows the compound annual per share growth percentages for sales, “cash flow,” earnings, dividends, and book value for the past five and ten years, as well as Value Line’s projections of growth for each item over the coming three to five years.
This data are important because, when used in conjunction with a Value Line analyst’s comments and projections, investors can better visualize growth trends, or lack thereof, for these important metrics. Moreover, the broad range of statistics offered allows investors of all types, from the growth-oriented to the value-oriented, to make use of this data to make better-informed investment decisions.
All rates are computed utilizing the average number for a base three-year period to an average number for a future period in order to eliminate short-term fluctuations that may distort results. As an example, to calculate the compound annual sales growth from 2000-2002 to 2007-2009, sales per share for each of the years 2000, 2001, 2002, are averaged. Next, the sales per share for the years 2007-2009 are added and divided by three to get their average, too. The 2000-2002 base period is then divided by the 2007-2009 base period. The resulting figure is then used to get the compound annual growth rate over the seven years from 2001 (the middle year) to 2008 (the middle year). Often, investors attempt to calculate a growth rate from one starting year to one ending year, and then struggle with the fact that the results differ from that of Value Line.
When viewed properly, the Annual Rates Box can be a powerful analytical tool. Obviously, everyone would like to see strong positive growth rates in each metric, but that is not always possible. In order to paint a full picture of what is really occurring at a company, all fields must be analyzed in conjunction with one another. For example, sales per share may be projected to remain flat over the projected time frame (a growth rate near zero), but earnings might be rising. This suggests that profit margins are increasing, which can be verified in the statistical array. This type of scenario may indicate a cost-cutting initiative being undertaken by management. While cost cutting can be a good thing for a bloated company, it is also not a growth engine for the top line, which limits its long-term value to shareholders.
The real benefit for subscribers, however, is that the numbers quickly summarize long-term trends. It helps answer questions like, “Has the company increased its top and bottom lines at a respectable clip over the past ten years?” That answer, depending on the growth rate one is seeking, is answered quickly by looking at the Past 10 Years column. Another likely question: “Is top- and bottom-line growth accelerating or slowing down?” The answer comes from comparing the Past 10 Years column to the Past 5 Years column. Looking to the future, one might ask, “Is growth in the future likely to be of the same magnitude as in the past?” Comparing the Estimated 3- to 5-year column with those of the Past 5 Years and Past 10 Years columns will give the answer.
This logic holds true for each of the items listed in the Annual Rates box. They can help investors synthesize a large amount of information in a relatively short amount of time. That said, these numbers shouldn’t be used in place of a year-by-year examination. They should be used as a first screen before one moves in for closer scrutiny.