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 Qn on FSA Application 
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Joined: 01 Mar 2013
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Hi everyone,
Appreciate it if someone could explain the correct answer for the qn below..
Which of the following stock screens is most likely to identify stocks with high earnings growth rates?
a. Dividend payout ratio 30%
b. Price to Cash Flow per share ratio c. Operating income to revenues ratio 20%
d. Book value to market value ratio
Thank you in advance!


18 Mar 2013
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Joined: 01 Mar 2013
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A is out - Higher DPO, Lower Retention Rate – Since g = ROE(RR), nope
B is out - Not really relevant to earnings growth?
D is out - Not really relevant to earnings growth?
SO I’d go with C…not really 100%, but I think it’s the best out of the provided answers.


18 Mar 2013
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Joined: 01 Mar 2013
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Im with hoffmag.
The way I would approach this question would be to immediately cross out options B (which is a valuation metric) and D (which just doesn’t really make sense to me).
Then i would remember that relationship Hoffmag has pointed out about sustainable growth and clearly eliminate A.
Leaving C. Operating income to revenues ratio 20%
It would appear to be logical to assume that earnings growth is positively correlated to EBIT.
Bubble it in and move on.
Warmest Regards,
I_Need_Sleep.


18 Mar 2013
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Joined: 01 Mar 2013
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Hi hoffmag2 & kpagarani,
thanks for replying.. i chose C as well.. but the book answer is D.
here’s the full book answer:
D. Firms with high growth rates will tend to have high market values relative to the book value of their equity.
C. High operating profit margins are not necessarily an indicator of earnings growth.
B. Low price to cash flow ratios would tend to identify value stocks rather than growth stocks.
A. Screening for high dividend payout ratios would tend to identify mature firms with relatively few growth opportunities.
Also, a very kind colleague of mine has illustrated why D is and C isn’t the answer.
for D: market value is a forward looking value that means a value that people ascribe to the company. so if market value higher than book value it means people are ascribing a high growth for the company.
for C: high operating income only means gross margin is high. the company may be profitable but not high growth. a new start up company has high growth but margins may be low.
Hope it helps =)


18 Mar 2013
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