Correlation. Managers focus on growth rates for corporate assets and profitability as indicators of the overall health of the corporation. Similarly, investors concentrate on rates of growth in corporate assets and profitability to gauge the future profit-making ability of the firm and the company€™s prospects for stock market appreciation. Five familiar measures focused upon by both managers and investors are the rates of growth in sales revenue, cash flow, earnings per share (EPS), dividends, and book value (shareholders€™ equity).

The table shown here illustrates the correlation among these five key growth measures over a 10-year period for a sample of large firms taken from The Value Line Investment Survey.

A. This correlation table only shows one-half of the pair-wise comparisons between these five measures. For example, it shows that the correlation between the 10-year rates of growth in sales and cash flow is 0.793 (or 79.3 percent), but does not show the corresponding correlation between the 10-year rates of growth in cash flow and sales. Why?

B. Notice the correlation coefficients between EPS growth and the four remaining corporate growth indicators. Use your general business knowledge to explain these differences.

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Correlation Analysis of 10-year Corporate Growth Indicators Sales Cash Flow EPS Growth Dividend Book Value Growth Growth Growth Growth Sales Growth 1.000 (1,492) Cash Growth Flow 0.793 1.000 (861) (870) 1.000 EPS Growth 0.655 (782) 0.860 (782) (876) 0.263 Dividend Growth 1.000 0.465 0.610 (601) (596) (648) (693) Book Growth Value 0.670 0.566 0.722 (871) 1.000 0.771 (973) (852) (842) (679) Note: Number of firms (pair-wise comparisons) are shown in parentheses. Data Source: http://www.valueline.com.