Stock Partner®

Sophisticated Stock Analysis FOR THE INDIVIDUAL INVESTOR

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Sustainable Return Screen

 This screen shows an alternative calculation also used by Warren Buffett.  This analysis uses the concept of the sustainable growth rate model which calculates the growth of a stock's book value by calculating its sustainable growth rate.  The sustainable growth rate is defined as the average return on equity multiplied by one minus the average payout ratio.  Return on equity represents the amount of new equity earned each year.  Subtracting the amount paid in dividends leaves equity that can be added to the book value each year.  Stock Partner calculates this book value growth over a 10-year period using the sustainable growth rate for each stock.  Using this calculated book value, Stock Partner then calculates the earnings per share and dividends paid for each of the ten years.  At the end of the ten-year period, Stock Partner calculates price appreciation based on future earnings per share and average price-earnings ratio for the stock.  The compound return calculated takes into account all dividends paid as well as price appreciation.  Stock Partner has now given you two independent ways of analyzing the value of a stock over a 10-year period in accordance with the investment philosophy of Warren Buffett.


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Last modified: September 26, 2011