27 June 2009

Documenting Changes to Our Gauges

During the two-year-plus life of this blog -- this is post #499 -- we have made frequent small adjustments to our gauges of corporate financial performance and value.  It isn't unusual for us to tinker with some factor multiple times until we get comfortable with it.

The following are the types of changes that we have made (and are likely to make again):
  • Add or delete a financial metric from a category gauge
  • Alter the relative weights of the various metrics used to compute one of the category gauge scores
  • Alter the relative weights of the category gauges when determining the Overall Gauge score.

The changes have been intended to make our analyses more accurate, complete, and insightful and, if possible, make the gauges better indicators. 

The catalyst for a change might be a belated realization that we had not been giving some aspect of a company's finances sufficient attention.  Or, we might have discovered that a financial ratio we relied on produces misleading results under certain circumstances.  It might also be recognition that a certain factor provides a better or worse indication of future results that we had first thought.

Our second-quarter 2009 analyses will include an additional Growth metric: the annual growth in Operating Profit after Taxes, when averaged over 4 years.  We have long wanted to add a multi-year assessment of company growth, but we've found Net Income to be too much affected by non-operating items as well non-recurring operating items.

We will also start, as part of an experiment, to compare Price/Earnings ratios to this Operating Profit growth rate to create a (better, we hope) variant of the well-known PEG ratio.

Although we've tried, we haven't done a good job at communicating these changes to readers.  We resolve to do better.  Too often, we have simply referred to "algorithm tweaks" to explain scoring changes.

As a first step, we have revised the descriptions of the GCFR dashboard and the Cash Management, Growth, Profitability, Value, and Overall gauges.  These posts were some of the first items published on this blog, and they had not been kept up with the changes we had made since.

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