June 24, 2014
Recently I went for a holiday in Goa. I was surrounded by the beaches and the beauty was mesmerizing. The architecture of churches was beyond imagination. But, don’t you think if you see the place yourself, then you will be able to connect more. That is the power of visuals. There’s a very old saying “what we see, we believe”. We humans have a very strong impact of the things which we see, perceive with our eyes instead of hearing it. And this theory can be applied to any area.
Let us try to see the impact of visual data in finance. We mostly prefer the pictorial or graphical representation of data rather than data being present in table form. The visual representation of data helps us in easy understanding of the change in trends and the difference in various factors or parameters. In simple words, just by looking at the graph we can easily distinguish between the various variables.
To make the concept clearer, I took football field graph as an example.
A football field graph is a graph showing the valuation of a company based on different methodologies. Valuation means the determination of value of company’s stock based on earnings and market value of assets.
I have the share prices based on different parameters like P/E, P/BV, EV/EBIDTA for different years say 2010, 2011 and 2012 and for DCF using different discount rates. What basically is happening is that these are some of the methodologies for the valuation of the company. None of the methods are perfectly right or wrong as they provide suggestive valuation of the company. Once different methodologies have been used, it is important to evaluate the valuation ranges derived from these methodologies. After that, the company uses this information to carve its valuation range. The result is summarised graphically by using the football field graph.
Above I have shown the share prices valuation base on different parameters for different years. This table has been represented graphically via football field graph.
The graph clearly indicates the maximum and minimum range of the shares. Graphical data not only makes us easy to understand but also it is compact and more presentable.
Let us learn how to create football field graph.
1) We have to find out the Min, Max and the difference between Min and Max in the following format
The above table can formed in the following way:
2) Make the Stacked Bar Chart
After performing above steps, we will get the following graph:
3) Remove legends and gridlines
4) Remove the Bar corresponding to MAX values
5) Add the data labels
6) “No fill” the bar corresponding to minimum values
7) Link the labels of “Difference” bar to “Maximum” values
8) Final Graph
The data I have shown here is very small, but in real life we have large amount of data. It becomes quite easy for us if we present it graphically.
In the end all I would say that try to make things simpler instead of complicating them. Remember, visual representation has more effect on our senses.