Killer charts

One of the things every experienced analyst and executive knows is that a good ‘killer chart’ can tell the story we want investors to hear and make them understand that story. Yet so many company presentations and research reports are full of numbers and text with little time spent designing that killer chart.

Ralf Frank and Christoph Horner recruited 20 investment professionals with an average investment experience of eight years to participate in an experiment where these professionals were asked to listen to a company presentation and then rate the attractiveness of the company as an investment. The trick was that about half of the participants were given the company presentation with the below graphic explanation of the company’s value creation model, while the other half was not shown the chart.

Graphic explanation of a company’s value creation model

Source: Frank and Horner (2023)

Note how the chart above shows how nonfinancial metrics like employee engagement and customer satisfaction drive operating profits and revenue generation. Next, the participants were shown a table with financial metrics on the left-hand side and non-financial metrics on the right-hand side.

Oh, and did I tell you that the participants wore eye-tracking devices during the presentation so the researchers could identify, which data the investment professionals focussed on? Below is the heat map of eye focus when the investment professionals were given the value creation model chart and when they were not.

Eye focus of investment professionals

Source: Frank and Horner (2023)

Two things stand out for me. First, on the left-hand side of the table, the investors who were given a chart explanation of how the company creates value focus a lot more on the key financial metrics like total revenue, operating profits and operating margins. The investors who were not given the chart were all over the left-hand side of the table trying to make sense of all that information.

Second, the investors who were given the value-creation model of the company as a chart spent more time on the right-hand side where employee engagement and other non-financial metrics were displayed that drive the financial metrics. Investors who were not given the chart almost completely ignored this data.

Thus, showing investors the model of how the company creates value as a chart helped investors focus on the metrics the company thinks are important. Investors subconsciously buy into the company narrative and use the data to check if the narrative works out in practice. But by focusing on the key performance indicators through the killer chart, the company also redirects investors’ attention away from poor metrics like the decline in earnings per share or the cut in dividends.

Focusing investors on the company narrative through this killer chart ultimately succeeds in creating a better opinion about the company and its shares. Investors who were given the value creation chart above as part of the company presentation were significantly more likely to recommend the company as a buy than investors who were not given the chart.

Programming note: I will be away for the next week. The next post will be published on Monday, the 5th of June.