The *Earnings Growth* criteria in the *Value Investing* framework of Benjamin Graham — Warren Buffett's mentor — require adjustment for *Inflation*.

## Definition

The *Earnings Growth* rating on *GrahamValue* is based on the following Graham rule:

5. A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

### Interpretation

The *Earnings Growth* rating on *GrahamValue* is expressed as a percentage of Graham's requirement — rather than the percentage of growth itself — for the sake of uniformity. A stock is considered fully *Defensive* when all its *Graham Ratings* are *100%*.

The years used for calculating the averages are the fiscal years *0, 1, 2* and *9, 10, 11* previous.

The *Earnings Growth* rating on *GrahamValue* is therefore to be interpreted as follows.

A value of *100%* indicates *33%* growth, or *Earnings* *1.33* times that of 10 years ago. A value of *200%* indicates *66%* growth or *Earnings* now *1.66* times, and so on.

Note: Since the upper limit of any *Earnings Growth* calculation is theoretically infinite, this rating is capped at *1,000,000.00%*.

### Inflation Adjustment

It may be worth noting that the *Inflation* rate in the U.S. in the 10-year period that Graham wrote the above rule for was about *33%*.

The CPI Inflation Calculator by the *U.S. Bureau of Labor Statistics* yields an increase in the *Consumer Price Index (CPI)* closer to *25%* for the decade *2012-2022*.

Therefore, an *Earnings Growth* of *25%* may be sufficient for a stock to qualify as *Defensive* today. This would correspond to a *Earnings Growth* rating of *75%* on *GrahamValue*.

Note: Non-U.S. economies such as the U.K. may also require an *Earnings Growth* rating of *75%* as of *2022*.

### Filter Calculator

The below *JavaScript* calculator can be used to automate the *Filter* or *Rating* calculation.

##### Inflation Rate / Earnings Growth (%)

##### Filter Value / Growth Rating (%)

## Example

Given below is an *Earnings Growth* rating calculation using the *2015* values of Universal Corp (UVV), using three years of *EPS* values each at the beginning and end of the period.

E00 = $3.70

E01 = $1.13

E02 =$0.31

Sum01 = $5.14

E09 = $4.06

E10 = $5.25

E11 = $4.66

Sum10 = $13.97

*Growth* = (Sum10 - Sum01) ÷ Sum01 = ($13.97 - $5.14) ÷ $5.14 = 1.72 = 172%

Note: The averaging of the sums (*÷3*) will cancel out from the above division, and so is not used here.

*Growth Rating* = 1.72 ÷ 0.33 = 5.2058 = 520.58%

## Watch Video

## Growth = Value

At the *2000 Berkshire Hathaway Annual Shareholders Meeting*, Warren Buffett explained that there is no distinction between *Growth* and *Value* stocks.

"But there is no distinction in our minds between growth and value. Every business we look at as being a value proposition. The potential for growth and the likelihood of good economics being attached to that growth are part of the equation in evaluation.

*Submitted by GrahamValue. Created on Friday 5th February 2016. Updated on Friday 19th August 2022.*

## Comments

## Inflation for 10 year

Inflation for 10 year earnings growth from 2013 to 2023, which now looks like 32.49% to me, is what I did right? The US Consumer Price Index was used

How do I set the filter to Saudi Arabia? Thank you

## Filter Calculator Above

Dear Omar_H,

Thank you for your comment!

32%looks about right. Using the month ofJulyfor both years of the decade, in theU.S. Inflation Calculatorlinked to above, appears to yield approximately31%.The official government link for

InflationinSaudi Arabiadoes not appear to have a calculator. But commercial calculators yield anInflationrate of about18%forSaudi Arabiain the same period.Entering

18%in the aboveFilter Calculatoryields a filter value of55%.Thank you again for your comment!