GEARS

This is a measure of the average annual return to making transactions according to the direction of gross margin. Everything else equal, rising gross margin produces an increase in the rate of growth of profits and should result in an increase in the share price. Falling gross margin results in a decline in profit growth and should result in a decline in the share price. An increase in the gross margin is a buy signal and a decrease is a sell signal. During the period when the stock is sold, treasury bills are the alternative investment. If the return to gross margin transactions is higher than the buy/hold return for the stock, then gross margin is a valuable factor.

Growth variables are exaggerated during periods when companies are merging according to the set of accounting rules called the “purchase” accounting method. Under the purchase method, management is allowed to stream a new company onto the books over a period of time. This exaggerates the company growth rate as measured by the income statement growth factors: sales growth, gross margin, EBIT margin, SG&A costs to sales, Interest costs/sales, income taxes/sales, free cash flow margin, and capital expenditures to sales. During periods when management is streaming a new acquisition, the factor appears as a flat line on the chart and the factor is removed from consideration. Acquisitions using the purchase method are rare before 2001. The Statement of Accounting Standards number 141 of June 2001 requires the purchase method for all acquisitions. During periods where fundamentals are distorted by a purchase accounting acquisition event, income statement growth factors are removed from consideration and we rely on cash flow measures of growth: cash from operations, cash from operating activities and net shareholder wealth.

The number of transactions is determined by the number of inflection points in gross margin as indicated by the top chart left. The success frequency counts the percentage of transactions that produced a positive return over the holding period or to last Friday’s closing price of the stock.

Use the back key on the browser to return to the previous page.

To return to the company search page point you browser to:

http://www.the-gears.com/reports/cosearch.aspx?symbol=navlinks&step=l1