Check the Stability of a Company's Five-Year Earnings Record

While the percentage rate of increase in earnings is most important, an additional factor of value, which we helped pioneer in the measurement and use of, is the stability and consistency of the past five years' earnings. We display the number differently than most statisticians do.

Our stability measurements are expressed on a scale from 1 to 99. The lower the figure, the more stable the past earnings record. The figures are ca^ulated by plotting quarterly earnings for the last five years and fitting a trend line around the plot points to determine the degree of deviation from the basic earnings trend.

Growth stocks with good stability of earnings tend to show a stability figure below 20 or 25. Equities with a stability rating over 30 are more cyclical and a little less dependable in their growth. All other things being equal, you may want to choose the security showing a greater degree of consistency and stability in past earnings growth.
Earnings stability numbers are usually shown immediately after a company's five-year growth rate, although most analysts and investment services do not bother to make the calculation

EARNINGS GROWTH RATE (STABILITY) RANK
1983-87        + 31%                          6
1981-85         + 19%                         8
1979-83         + 19%                         8
Earning* stability rank

If you primarily restrict your selections to ventures with proven growth records, you avoid the hundreds of investments having erratic earnings histories or a cyclical recovery in profits that may top out as they approach earnings peaks of the prior cycle.