Rule #1 Finance Blog

With Investor Phil Town

Rule #1 Question of the Week: Negative Calculations

Hi folks. Instead of the usual Monday a.m. Q&A, I’m posting a reminder of how to do Rule #1 growth rate calculations using negative numbers.  (Please consult the Excel formulas guide in the Resources section of the Rule #1 site for detailed instructions on setting up these calculations in Excel. Registration required.)

Our calculator developers are working on making the calculators handle negative input data and negative growth rates.  Until we get that finalized (in testing now), here are some guidelines for you to follow.

How do you calculate a growth rate if the starting number is a negative number?

1.  If the oldest numbers are negative but get less negative in
time, and then go positive and continue to grow consistently more
positive, this just indicates either a start up or a turnaround point
years ago.  If the first positive year was 6 years ago or more, then go
ahead and calculate the growth rate starting with the first positive
year. If it was more recent than that, this is a Risky Biz.  Treat it
as such.

2.  If there are negative numbers scattered through the 10 years, bail.  This is an inconsistent business.

3.  If a single negative year happens to fall on the 5 or the 3 yr
calculation, shift to a positive year.  For example, if 5 then go to 6,
if 3 then go to 4.  Don’t forget to change the number of years in the calculator.

One negative year is not a deal killer.  We’re looking for
consistency, and even great businesses can have a bad year.  Often
that’s when we want to be buyers — because Mr. Market will get very
depressed and sell it too cheap.

Many of you are asking about where to find, and the right way to calculate, Free Cash Flow.  Please consult the newly updated FAQ for detailed instructions.  These instructions are also posted in the instructions for the calculator itself.  (Site registration required to view the calculators.)