Appendix B: How to Use the Ratio Chart and Calculator
Ratio Chart:
The first page of the Stock Selection Guide (SSG) is a ratio or semi-log chart.
We use this type of chart instead of a regular graph paper because consistent rates of growth are shown as a straight line. Equal vertical distances represent constant percentage relationships. The distances between 1 and 2, 2 and 4, and 4 and 8 all show increases of 100%.
The ratio chart has two cycles. The first cycle starts at 1 and goes to 10. The second cycle starts at 10 and goes to 100.
Since the numbers that we are plotting will vary, we use the flexibility of the ratio chart to assign different values to the numbers on the chart. The unit of 1 on the ratio chart can mean 10, 100 or even 1 million. Whatever value we assign to 1, all other guide numbers must relate. When the baseline represents 100 million, 4 becomes 400 million and 6 stands for 6 million.
There are no negative numbers on the ratio chart. Numbers must always be positive. If the company that you are reporting on has negative numbers, you can’t put them on the ratio chart.
NAIC’s Ratio Calculator:
The NAIC Ratio Calculator is available for $.50 each from the NAIC Membership Catalog. It is a small paper ruler that helps determine price/earning ratios, pre-tax profit margins, percentage earned on invested capital and dividend yields without in-depth calculations. Once you plot certain information on the front page of the SSG ratio chart, you can use the ruler to acquire particular figures.
To determine the high and low P/E ratios, you place the Ratio Calculator parallel to the price bar for a particular year. You line the index line on the calculator up with the EPS (earnings per share) mark on the chart. Read the figure on the Ratio Calculator where the top and the bottom of the price bar fall. These figures are the high and low P/E’s for the year.
If we plot the pre-tax profit figures on the same cycles as sales, we can use the Ratio Calculator to read the percent of pre-tax profit earned each year. Lay the Ratio Calculator on the vertical time line so that the index line of the Calculator is at the sales point. Read the pre-tax profit percentage from the point on the Calculator.
To read the percent earned on invested capital, plot book value per share on the chart in the same cycle as earnings per share. Place the Ratio Calculator on these marks, and read the relationship between the two.
Dividend yield can be determined by plotting the dividend per share on the same cycle as price, and use the Ratio Calculator to determine the value.