Once you have estimated the historical growth of the stock you are studying, you need to make a decision about the company's future prospects. Is growth likely to continue at the same rate in the future? Will the company's growth slow, or even increase from its historical pattern? Common sense tells us that good growth stocks are able to continue their growth, but they may not be able to grow as quickly as they have in the past. It may be prudent to allow for a slowing of growth in the future, especially with high-flying companies that may find it hard to sustain their rapid growth.
Now, extend the historical trend lines, or draw new trend lines to reflect your expectation of the company's future growth. Draw your new line all the way from the far left to the far right margins, and, as before, measure the distance to calculate the future percentage growth. Record your projections at the bottom of the graph.
Interpreting the Results
By now, you should have filled the Page 1 graph with a multitude of lines, points and annotations, and you can see why using colored pencils may be helpful! But a picture is worth a thousand words, and you should now have a good overview of the company you are studying. Has growth been very rapid, or slow and steady? Are there periodic dips in EPS that indicate the company may be in a cyclical industry? Have EPS and Revenues grown at a consistent rate, or are Earnings growing faster than Revenues, indicating an increasing profit margin but hard to sustain over the long term? Has the stock's price kept pace with the company's growth over the years?
You can also calculate future EPS mathematically based on your revenues projection. NAIC calls this the "Preferred Procedure" because it can provide a more accurate EPS figure, since Revenues are typically more consistent than earnings for most companies. You can see a more complete tutorial about using the Preferred Procedure.
Your decision about the company's future growth is one of the most important judgements you need to make to use the SSG properly. Having made your projections, you can now turn to Page 2 of the SSG.