The most important activity of an investor is to be able to estimate with confidence the profit rate on buying stock in a company and holding it for your investment time frame. And you want to be able to do this based on numbers that you can see and adjust such as the growth rate of earnings.

You can do this and more in a few minutes with the Valuesoft Investment System.

Valuesoft provides essential tools for investors of all levels, from those just getting started to the most experienced professionals.

The building blocks of Valuesoft are investment functions. You can use these functions on their own. Or you can use them to build templates to suit your own needs. With these functions and templates you will be able to focus on the important aspects of investing and not get hung up on jargon, rumors, and complex calculations.

All the functions are clearly explained in the manual along with examples of different types of templates. The following is an example of how to use one of the Valuesoft functions to analyze a company.

Stock Return Analysis

Suppose you are considering an investment in ARB Corporation, the company that manufactures, distributes and sells four wheel drive motor vehicle accessories and light metal engineering works in Australia and worldwide. (ASX code: ARP).

After having done an analysis of the company (its products, competitors, and so on), you are ready to crunch some numbers. (For an example of a USA company, click here.)

This is where the Valuesoft Investment System comes in.

Suppose you are interested in estimating the percentage return on buying ARB now and holding it for 5 years. You will need some data. You can get what you need free from YahooFinance or from NineMSN Investor. You can also obtain data from various online brokers such as Commsec. (You will need to open an account.)

For this example we will use Yahoo. First go to Detailed Quotes for ARB (symbol: ARP) and then click on Profile. This gives you the page  au.biz.yahoo.com/p/a/arp.ax.html.

You will also need the research page giving the earnings forecasts: au.us.biz.yahoo.com/z/a/a/arp.ax.html

You might find it easiest to print these pages before you start. The following is the list of the required data. (More details of these terms can be found in our glossary Click here. For the financial glossary at Yahoo, click here.)

Current price: this is the last price at which the stock was sold (Profile page)
Earnings per share (EPS): the total earnings of the company divided by the number of shares outstanding (profile page). Think of this as the amount of money that the company is earning on your behalf for each share that you own.
Price to earnings ratio (P/E ratio): the current price divided by the earnings per share (Profile page).
Projected growth rate of earnings: this is a forecast of the average growth rate of earnings. Use the figure in the column "Next 5 Years" on the Analysts Estimates page even though you may have a longer time frame in mind. If you are not given a figure (perhaps because no analysts are following the company), enter the average percentage growth rate for the past 5 years. If this is also missing, then beware of investing in this company. With less than five years of data, it is very difficult to make any forecasts. (In the Level 2 Templates you will see how to avoid having to rely on analyst forecasts.)
Years: the time frame of your investment. Generally this will be 5 years or more.
Payout rate: this is the percentage of earnings that the company pays out in dividends. You don't get this figure directly on the Profile page. However, you can easily calculate it by dividing the Dividends by the Earnings per Share. For example, if the dividends are $0.115 and the EPS is $0.237, then the payout ratio is 0.115 / 0.237= 48.5%. (Even simpler is to type "= 0.115 / 0.237" in the appropriate cell and Excel will do the calculation for you.)

For things like the P/E ratio and the projected growth rate, don't worry too much about decimal places. It is likely that you will change them to more conservative figures when you have everything all set up.

The last two requirements are:

Tax rate on dividends: this is your marginal rate of tax.
Tax rate on capital gains: for simplicity I will set these at 0% in the following examples.

When you have done this you get the following numbers.

Now enter this data into an Excel page to get something like shown in the following figure:

I have added some color and borders around the required data. 

In the cell I3 type =STRETD(A4,B4,C4,D4,E4,F4,G4,H4) and press return. (You don't need to use uppercase letters. If you are familiar with Excel, you can get the same result more quickly by using  the function button and going to the function STRETD, which stands for STock RETurn with Dividends reinvested.)

When you have done this you will get:

In this case I have formatted the cell I3 as a percentage. If you did not do this you would get something like 0.179716. Also I have put the cursor back into cell I3.

The number 17.97% is an estimate of the after-tax annual return by purchasing ARP for $4.60 and holding it for 5 years. This is the average percentage return each year for 5 years.

Of course, the above only works when you have purchased and loaded Valuesoft. Without Valuesoft, you will get the result #NAME?

Margin of Safety
Remember,  none of the inputs can be totally accurate. It is up to you to adjust them to allow for a margin of safety and other outcomes of your investigations. (In the Level 2 Templates we show how Valuesoft has built-in finctions for calculating a level of safety as a staring point for your own margin of safety.)

In the 1999 annual report of Berkshire Hathaway, Warren Buffett said that he employs "a range of values, rather than some pseudo-precise figure." With Valuesoft this is a snap since each time you enter a new number and press return, the answer is automatically recalculated.

For example, you might think that the current P/E ratio is too high so you replace it by 17. Also you are not sure about the projected growth rate of earnings so you replace it by 10%. Now you get the results:

This time the estimated before-tax return is 10.18% per year.

With more experience, you can do the above analysis in a few minutes. Once you have set it up for a company, it is a simple matter to update that data as new information becomes available.

STRETD is only one of the 25 functions in Valuesoft. Another of my favorite functions is TARGD. This calculates the price that you would need to pay to achieve your desired return. When you do this, you set yourself up to wait until there is a dip in the price. At that moment you can buy the stock you want at your price to get your return.

Click here to purchase the Valuesoft Investment System.

Click here to read about the hidden desire of investors.

Level 2 Templates Click here