8/2/2015

22ndApril

AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistorical
Performance

Almostallequityresearchreportincludedataonthehistoricalperformanceofthecompanyresearched.Mostofthe
dataisprovidedintableswithafewaspectsgraphedinthereport.Theperformanceofthecompanyisdiscussedin
thetextthediscussionrefertosomeofthedataprovidedinthetables.Thereaderisrequiredtoreadthedata
providedinthetablesandthewriteup,tounderstandthebasisfortherecommendationsmadeinthereportandto
evaluatethem.Tables,however,arenotveryeffectiveinrevealingtrendsovertimeinaparticularmeasureorin
revealingtrendsinassociatedandcontributingelements.Avisualrepresentationofthehistoricalperformancedate
wouldsignificantlyenhancetheusefulnessofthereporthelpingthereadertoquicklyassimilatethefactsand
analyzetherecommendations.
Aninsightfulanalysisofthehistoricalperformanceofthecompanycanbeundertakenbyusingthestructureprovided
bytheDuPontanalysisoftheReturnonEquitymeasureandavisualrepresentationofthisstructure.Trendsinthe
ROEanditscomponentscanthenbeeasilyassessedandassimilated.Ausefulvisualizationthatcanbeusedforthis
purposeisillustratedinthisarticle.
TheillustrativevisualizationinthispostdrawsontechniquessuggestedbyRolfHichert,
[https://www.blogger.com/Hichert%20http://www.hichert.com/excel/exceltemplates/templates2012.html#021] theRatioTreeand

thescalingline.TheRatioTreeisalsooneofthetemplates[http://www.hichert.com/certifications/307] usedforevaluating
thecomplianceofasoftwaretoIBCSStandardsonwhichIhavewritteninearlierposts.[Pleasenotethatthe
visualizationinthispostisnotcompliantwiththerecommendationsoftheIBCSstandardse.g.widthofthecolumns
forbasicmeasures/ratioamongstothers].
Somemodificationsofthetechniquehavebeenmade,inparticulartheinclusionofthedataforapeercompany.
Theinclusionofthepeercompanydataprovidesabasisforassessingtheprimarycompaniesperformance[ratios
varyfromindustrytoindustry]aswellastheuniqueaspectsspecifictothecompanybeenresearched[economic
moat,differingoperationalandfinancialstrategies].Further,webbasedresearchproductsgenerallyprovide
informationofpeercompanieswhilealsoofferingfunctionalitiestocomparemeasureswiththoseofthepeer
companies.Includingthepeercompanydatainthechartintheresearchreportenablesthiscomparisoninwritten
reports.
Forthepurposeoftheillustrationdataoftwocompanieshavebeenconsidered.Thedatawasobtainedfroma
financialwebsite[Morningstar[http://www.morningstar.com/] ]sincethedataisbeingusedonlyforillustrative
purposes,thenameofthecompaniesarenotrelevant.Thecompaniesarefromthesameindustry.
http://www.visualquest.in/2015/04/aprofitableendeavourratiotree.html

1/4

8/2/2015

AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

Theproposedvisualization:

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

Thevisualizationillustrateshowthehistoricalperformanceofthecompanycanbeeasilyassessedand
comprehensiblyanalysedusingtheRatioTree.Theoveralltrendintheindividualmeasuresanditsimpactonthe
ROEcanbeeasilyseen.Comparisonwiththeothercompaniesalsohighlightsthestrategicdecisionstakenbythe
http://www.visualquest.in/2015/04/aprofitableendeavourratiotree.html

2/4

8/2/2015

AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

company[inthisparticularcase,thehigherdebtfinancingpolicyofABCcompanyisclearlyevidentaswellasthe
trendinreducingthefinancialleverageinthelastfewyears.]Performanceonothermeasuresisalsoclearlyevident.
Oneofthemajorissuesinvisualizationsofthisnature[whereanumberofchartsareplacedonasinglepage]isthe
needtomaintainacommonscaleacrossthecharts.Thisisacriticalrequirement.However,thiscanbedifficultas
canbeseenintheillustrationifthesamescaleisusedforoperationalprofitandnetprofitasthatforsales,the
visualizationforthosemeasureswouldbequiteineffective.Asolutionistheuseofthescalingline.Theuseofthe
scalinglineallowsustouseadifferentscaleforsomeofthechartsenablingmoreeffectivevisualization.Thescaling
lineclearlyhighlightsthecorrectscalingfactorsforthecharts.
Ratherthanjustprovidingtablesofdata,equityresearchreportsshouldincorporatevisualizationsimilartooneinthis
post.Inclusionofthevisualizationwouldmakethereportsmorereaderfriendlyenablingthemtoassimilatethe
messageoftheresearchreport.
Theuseofthetechniquecanbeextendedtootherareasalso,itcanbeextendedtoreviewtheprojectionsmadeby
theanalysts.Historicalperformanceprovidesabasisfortheseprojections.Acarefulassessmentofthehistorical
trendsprovidesabasisforevaluatingtheprojectionsaswellasinunderstandinganychangesinassumptions.
ThetechniquecanalsobegainfullyemployedinAnnualReports.Annualreportsgenerallyincludeasectiononthekey
historicalfinancialdata.Againinmostcases,theseispresentedintables.VisualizationusingtheRatioTreewouldbe
quiteuseful.Ofcourseinsuchvisualizationacomparisonwithapeercompanywouldnotbeincluded.

Posted22ndAprilbyPareshShah
Labels:BusinessgraphicsEquityResearchReports,IBCS,RatioTree,RolfHichert
0 Addacomment

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

3/4

8/2/2015

AProfitableEndeavour:RatioTreeAnalysis[ROE]ofHistoricalPerformance|VisualQuest

Enteryourcomment...

Commentas:

Publish

PareshShah(Google)

Preview

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

Signout

Notifyme

4/4