8/2/2015 AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

http://www.visualquest.in/2015/04/aprofitableendeavourratiotree.html 1/4

22ndApril

Almostallequityresearchreportincludedataonthehistoricalperformanceofthecompanyresearched.Mostofthedataisprovidedintableswithafewaspectsgraphedinthereport.Theperformanceofthecompanyisdiscussedinthetextthediscussionrefertosomeofthedataprovidedinthetables.Thereaderisrequiredtoreadthedataprovidedinthetablesandthewriteup,tounderstandthebasisfortherecommendationsmadeinthereportandtoevaluatethem.Tables,however,arenotveryeffectiveinrevealingtrendsovertimeinaparticularmeasureorinrevealingtrendsinassociatedandcontributingelements.Avisualrepresentationofthehistoricalperformancedatewouldsignificantlyenhancetheusefulnessofthereporthelpingthereadertoquicklyassimilatethefactsandanalyzetherecommendations.

AninsightfulanalysisofthehistoricalperformanceofthecompanycanbeundertakenbyusingthestructureprovidedbytheDuPontanalysisoftheReturnonEquitymeasureandavisualrepresentationofthisstructure.TrendsintheROEanditscomponentscanthenbeeasilyassessedandassimilated.Ausefulvisualizationthatcanbeusedforthispurposeisillustratedinthisarticle.

TheillustrativevisualizationinthispostdrawsontechniquessuggestedbyRolfHichert,[https://www.blogger.com/Hichert%20http://www.hichert.com/excel/exceltemplates/templates2012.html#021]theRatioTreeandthescalingline.TheRatioTreeisalsooneofthetemplates[http://www.hichert.com/certifications/307]usedforevaluatingthecomplianceofasoftwaretoIBCSStandardsonwhichIhavewritteninearlierposts.[PleasenotethatthevisualizationinthispostisnotcompliantwiththerecommendationsoftheIBCSstandardse.g.widthofthecolumnsforbasicmeasures/ratioamongstothers].

Somemodificationsofthetechniquehavebeenmade,inparticulartheinclusionofthedataforapeercompany.Theinclusionofthepeercompanydataprovidesabasisforassessingtheprimarycompaniesperformance[ratiosvaryfromindustrytoindustry]aswellastheuniqueaspectsspecifictothecompanybeenresearched[economicmoat,differingoperationalandfinancialstrategies].Further,webbasedresearchproductsgenerallyprovideinformationofpeercompanieswhilealsoofferingfunctionalitiestocomparemeasureswiththoseofthepeercompanies.Includingthepeercompanydatainthechartintheresearchreportenablesthiscomparisoninwrittenreports.

Forthepurposeoftheillustrationdataoftwocompanieshavebeenconsidered.Thedatawasobtainedfromafinancialwebsite[Morningstar[http://www.morningstar.com/]]sincethedataisbeingusedonlyforillustrativepurposes,thenameofthecompaniesarenotrelevant.Thecompaniesarefromthesameindustry.

AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance

8/2/2015 AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

http://www.visualquest.in/2015/04/aprofitableendeavourratiotree.html 2/4

Theproposedvisualization:

[http://1.bp.blogspot.com/vBYKweSWLNc/VTdE3XrpI9I/AAAAAAAADuQ/2sEQcfesrBA/s1600/ROE%2BAnalysis.jpg]

ThevisualizationillustrateshowthehistoricalperformanceofthecompanycanbeeasilyassessedandcomprehensiblyanalysedusingtheRatioTree.TheoveralltrendintheindividualmeasuresanditsimpactontheROEcanbeeasilyseen.Comparisonwiththeothercompaniesalsohighlightsthestrategicdecisionstakenbythe

8/2/2015 AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

http://www.visualquest.in/2015/04/aprofitableendeavourratiotree.html 3/4

company[inthisparticularcase,thehigherdebtfinancingpolicyofABCcompanyisclearlyevidentaswellasthetrendinreducingthefinancialleverageinthelastfewyears.]Performanceonothermeasuresisalsoclearlyevident.

Oneofthemajorissuesinvisualizationsofthisnature[whereanumberofchartsareplacedonasinglepage]istheneedtomaintainacommonscaleacrossthecharts.Thisisacriticalrequirement.However,thiscanbedifficultascanbeseenintheillustrationifthesamescaleisusedforoperationalprofitandnetprofitasthatforsales,thevisualizationforthosemeasureswouldbequiteineffective.Asolutionistheuseofthescalingline.Theuseofthescalinglineallowsustouseadifferentscaleforsomeofthechartsenablingmoreeffectivevisualization.Thescalinglineclearlyhighlightsthecorrectscalingfactorsforthecharts.

Ratherthanjustprovidingtablesofdata,equityresearchreportsshouldincorporatevisualizationsimilartooneinthispost.Inclusionofthevisualizationwouldmakethereportsmorereaderfriendlyenablingthemtoassimilatethemessageoftheresearchreport.

Theuseofthetechniquecanbeextendedtootherareasalso,itcanbeextendedtoreviewtheprojectionsmadebytheanalysts.Historicalperformanceprovidesabasisfortheseprojections.Acarefulassessmentofthehistoricaltrendsprovidesabasisforevaluatingtheprojectionsaswellasinunderstandinganychangesinassumptions.

ThetechniquecanalsobegainfullyemployedinAnnualReports.Annualreportsgenerallyincludeasectiononthekeyhistoricalfinancialdata.Againinmostcases,theseispresentedintables.VisualizationusingtheRatioTreewouldbequiteuseful.Ofcourseinsuchvisualizationacomparisonwithapeercompanywouldnotbeincluded.

Posted22ndAprilbyPareshShah

Labels:BusinessgraphicsEquityResearchReports,IBCS,RatioTree,RolfHichert

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8/2/2015 AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

http://www.visualquest.in/2015/04/aprofitableendeavourratiotree.html 4/4

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