The free earnings steadiness rating tries to measure the level of variability in the company's free earnings stream from one period to the next over the past seven accounting periods. Unlike other ratings that attempt to measure the stability level of a particular variable based exclusively on the variance calculation, the Gradement steadiness ratings use a modified version of the variance statistics named coefficient of negative variation. This coefficient, developed by Gradement, is an improved version of the one proposed by Benjamin Graham (Security Analysis, third edition). Unlike the variance, that considers both the up and down changes in the free earnings, this coefficient only takes into account the negative variations.
A high value of this rating will indicate that there have been no large downsides to the free earnings in the last accounting periods and that, if any variation has occurred, most of them will have been upwards. A low value will indicate that most of the changes in the free earnings have been downside.
The following table can serve as a reference for the use of this rating:
|Rating value range||Interpretation|
|0 - 5||Large negative variation in free earnings|
|5 - 7||Small negative variations in free earnings|
|7 - 10||Stable or increasing free earnings|
The valuation model used by Gradement is based on the use of past accounting variables to estimate the future evolution of the company. The past stability of these variables allows us to predict that such stability will be maintained in the near future, so that the value of the ratings calculated by Gradement will be based on an expected behavior of the company and, therefore, will be more valid when making investment decisions based on thems.
The lack of stability in accounting variables, reflected in a low value of this steadiness ratings, makes it difficult to estimate the future evolution of the company and therefore devalues the usefulness of the ratings we calculate.
The Gradement rating incorporates this free earnings steadiness rating in its calculation so that the value indicated by that rating will increase with sufficiently stable free earnings and will decrease otherwise.