Visual Analysis of Sales, PTP and EPS lines in Take Stock (Ellis Traub).

It might make it easier if you consider the Visual Analysis one piece at a time.

Does the Sales line look straight? That means Sales growth is pretty consistent; usually what we'd prefer to see.

Is the Sales line getting steeper recently? That indicates more rapid Sales growth, but is unusual. Generally Sales growth slows as a company gets older and bigger. If there is a sudden large upward "jag" in Sales that often indicates a large acquisition. A large acquisition is a situation that tends to make the rest of the Visual Analysis harder to interpret and the future harder to project.

Is the Sales line getting less steep recently? That indicates slowing Sales growth. Slowing Sales growth is "normal" as a company gets larger. However, as an investor, too much slowing that persists over time is not a good sign. BBBY is a classic example of this.

The gap between the PTP and Sales lines shows exactly the same thing as SSG section 2A (pre-tax profit margins). If the gap changes enough that you notice it on the Visual Analysis, then PTP margins probably changed significantly.

With Sales above PTP on the graph, a smaller gap is the same thing as higher PTP margins, which is a good thing. More of every dollar of Sales is being kept as profit (less of every dollar of Sales is being spent on expenses). A larger gap is the same as lower PTP margins (not so good).

Variation in PTP margins is normal so look for a trend. Seeing changes in PTP margins before they show up on the Visual Analysis or SSG section 2A is perhaps the primary reason for looking at PERT-A. Remember that PERT-A tells you the same story as the Visual Analysis, just from a different point of view. If you think they're telling different stories, you're reading at least one of them wrong (or there is a data error).

The gap between the EPS and PTP lines shows the combined effect of changes in tax rate and shares. Anything that changes the size of this gap is unsustainable. If the gap changes enough that you notice it on the Visual Analysis, the underlying change (taxes and/or shares and/or other things) is probably significant. So, if the EPS line is getting steeper but the PTP line isn't following suit, don't expect that situation to continue. Without further investigation, It's generally not possible to know just what things caused a change in the size of this gap (and just how good or bad those things might be).

Remember that when the Sales line changes direction (i.e., isn't straight), the PTP and EPS lines generally also change direction in about the same way. If they don't, that's a warning that you should investigate the cause. If the gap between Sales and PTP lines changes noticably, investigate why PTP margins changed. If the gap between PTP and EPS lines changes noticably, investigate why taxes and/or shares (and/or something else below PTP on the income statement) changed

-Jim Thomas


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I have an article in my BI binder from BI magazine, dated May 2006.  The title is, "Introduction to the income statement" and it is written by Ann Cuneaz.  In it, she talks about "reading the graph" from SSG section I, visual analysis.  Most people align the graphs in the same order as on an income statement: Sales on top, followed by pre-tax profit (PTP)and earnings per share (EPS). The gap between Sales and PTP represents expenses; the gap between PTP and EPS represents both taxes & number of shares.  If we only concern ourselves with graphs that have fairly straight lines for each of these three items, then we have seven different scenarios to consider: All three lines are parallel (preferably rising to the right or curving upwards to the right). This means expenses are under control and taxes & shares outstanding are holding steady.  This is an excellent situation. Sales and PTP are rising and parallel but EPS is diverging. This means expenses are under control but tax rate and/or # shares are increasing. Taxes cannot be controlled (much) so this is ok. However, an increase in shares indicates dilution and that's not good. PTP and EPS are parallel but flat; Sales are increasing.  This means profit margins are declining. This is not good. PTP and EPS are parallel and rising but Sales are flat. This means there has been an increase in efficiency (expenses are under control).  This is ok. Sales and PTP are parallel but flat; EPS is increasing. This means expenses are under control, and either or both taxes are being reduced (good) and/or # shares is being reduced. It was discussed here on the forum recently that although most people consider a share buyback to be a good thing, historically these stocks have not appreciated very well. Sales are flat, PTP is increasing, EPS is flat. This means expenses are decreasing (good) but taxes and/or shares outstanding are increasing. Again, taxes cannot be controlled and an increase in shares indicates dilution and that's not good. Sales are increasing, PTP is flat, EPS is increasing. This means expenses are increasing (not good), but taxes are declining (good) and/or # shares is decreasing (good). Bob Mann

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