How Stocks are Rated

The ratings computed for individual stocks in the Stock Rover Stock Ratings facilities are all based on past performance of the company verses industry group peers. Ratings are computed in a number of different categories such as Growth, Valuation, Efficiency, Financial Strength, Dividends and Momentum.

While the exact formulas used to rate stocks are proprietary, we can describe in a general way how the rates are computed. The basic idea is to look at the trajectory and volatility of a number of different metrics in a given category over time relative to peers. Each metric gets a raw rating that is then converted to an industry group percentile rank. Then an overall category rating is computed based on the percentile ranks of each of the individual metrics in the category. Not all metrics in a given category are weighted the same when computing the overall category rating. Metrics that are considered more important are given a higher weight and less important metrics get a lower weight.

For example in the growth category, we look at the following metrics:

  • Revenue Growth
  • Operating Income Growth
  • Net Income Growth
  • EPS Growth
  • Revenue Per Employee
  • Next Year’s Expected Revenue Growth
  • Next Year’s Expected EPS Growth
  • Morningstar Grades – Growth
  • Intangible Assets as a % of equity growth

For each given metric, there is a specific formula that is used to evaluate the performance of the company vs. its peers. That formula generates a raw rating that is then converted to a percentile vs. peers.

For example for Revenue Growth, Operating Income Growth, Net Income Growth and EPS Growth we look at the computed 1 year, 3 year, 5 year and 10 year growths rates. We also look at the slope (trajectory) of the raw growth metric, as well as the volatility of that growth to arrive at an overall raw rating, which is then converted to a percentile against peers.

Another example of a slightly different calculation is the revenue per employee metric where we look at the industry group percentile ranking along with the trajectory and variability of revenue per employee over time. Revenue per employee is an example of a metric that has a lower weighting towards the overall growth rate vs. for example EPS growth, which has a higher weighting.

Stock Ratings Overview Profile