23 November 2006

The Overall Gauge

We've separately discussed the four category gauges: Cash Management, Growth, Profitability, and Value.  Each gauge displays a score between 0 and 25.

The Overall Gauge score is a weighted average of the category gauge scores, with an adjustment made to scale the result to a range between 0 and 100 points.

The weights are listed below:
  • Cash Management: 20
  • Growth: 10
  • Profitability: 30
  • Value: 40

The Overall score is:

    = 4 * [(sum of (scores * weights)] / (sum of weights)

Because we are very stingy when awarding points, an Overall score, in general, above 50 is decent, 60 is very good, and 70 is excellent.  The highest scores we have observed have been in the low 80's.

We also consider a change in the Overall Gauge score to be significant.  While a 40-point score is, by itself, mediocre, we would deem a rise from, say, 20 to 40 points to be a favorable outcome.

In weighting the various metrics that drive each category gauge, and in weighting the category gauge scores to compute the Overall Gauge score, we have used heuristics to align the results with future share price appreciation.  The highest-weighted scores are those that have historically correlated reasonably well with 12-month share price growth for a variety of companies. 

We've seen some good correlation coefficients, as high as 0.8, for some companies, but the correlations are much weaker or even negative for other companies. 

In other words, our scores are meaningful for some companies and less so, or not at all, for others.  We urge readers to look beyond the rolled-up scores to the individual performance and value metrics and draw their own conclusions. 

This post was last modified on 27 June 2009.

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