Below
the KEY STATISTICS and SHARE CAPITAL, HOLDINGS,
DEALINGS there is a five-year summary of historic
financial statistics, together with two-year forecasts
derived from the brokers' consensus forecast when
available. These statistics, set out year by year,
enable
analysts to form a view of their future reliability
and whether or not there is a significant trend.
The statistics need reviewing one by one:-
Turnover is defined as invoiced
sales for each period net of value added tax.
Growing sales are a key feature of successful
growth companies, so the trend of turnover is
of crucial importance. As many companies also
grow by acquisition, the turnover statistics should
always be considered in relation to turnover per
share, which is shown five lines below.
Depreciation is the amount charged against
the company's profit for each period to provide
for the deterioration in value of its tangible
fixed assets, in accordance with generally accepted
accounting principles.
Depreciation is shown separately because it is
of interest to many analysts in its own right
and it is also a constituent of EBITDA (earnings
before interest, tax, depreciation and amortisation).
EBITDA can be calculated for each year by adding
together depreciation, interest paid (net) and
normalised pre-tax profit shown in the second,
third and fifth lines. It is argued that similar
companies can be better compared with each other
on an international basis by using EBITDA, as
this avoids the problem of differing tax rates
and differing methods of depreciation. However,
EBITDA does not do away with the problem of businesses
having
differing levels of borrowings, which do, of course,
need to be borne in mind.
Interest
paid (net) is the net cost of borrowings
for each period. It is made up of financial charges
and interest payable on loans, overdrafts and
finance leases, net of any interest capitalised,
less interest receivable. Interest paid is also
a constituent of EBITDA.
FRS3 Pre-tax profit is taken
directly from the results as reported by the company
under Financial Reporting Standard 3. FRS3 results
reflect all items of profit or loss, including
those which might be regarded as non-trading or
exceptional in nature, and which might be considered
to distort any view of underlying or maintainable
performance. The normalised
pre-tax profit is far more pertinent and interesting
to growth investors and is the better figure to
use for calculating EBITDA.
Normalised pre-tax profit is
calculated by taking reported results for each
period as a starting point, and then excluding
any items which are exceptional, abnormal, or
non-recurring in nature, and any non-trading profits
and losses. The resultant figures are particularly
useful for
year by year comparisons and for showing the trend.
Turnover
per share shows total turnover or operating
revenues for each period divided by the weighted
average number of ordinary shares in issue during
that period. With acquisitive companies, the resultant
figures are far more pertinent than turnover and
show the trend much more clearly.
Operating margin is the percentage
that the trading profit bears to sales or total
trading revenues for each period.
For growth stock investors, a trend of increasing
margins is very bullish indeed. Conversely, a
trend of deteriorating margins is a cause for
alarm. The ideal combination is fast rising turnover
coupled with rising margins.
ROCE measures the percentage
return achieved on invested and borrowed capital
(i.e. capital employed).
A high ROCE (over 20% or more) validates a company's
competitive advantage. The trend of ROCE should
be watched carefully as a marked deterioration
might suggest that a company is losing its competitive
advantage. Conversely, improving ROCE usually
indicates that a
company is becoming more efficient.
ROE measures the return achieved on invested
equity capital. A high ROE, if sustained, usually
results in high EPS growth, whereas a low ROE
of say under 15% usually results in poor EPS growth.
When comparing the ROE of two similar businesses,
the level of their gearing needs to be borne in
mind. Businesses that enjoy a high rate of return
on money invested can increase their ROE substantially
by using borrowings financed at a relatively low
rate of interest. ROE enthusiasts might perhaps
argue that the management of successful companies
that
borrow in this way is more effective (from a shareholder's
point of view) than that of companies with a high
rate of return and no borrowings. As a measure
of management efficiency, I prefer ROCE to ROE
because it shows the rate of return on all the
funds in the business, whether they are invested
capital or borrowings.
FRS3
EPS are taken directly from the results
as reported by the company under Financial Reporting
Standard 3. FRS3 EPS reflect all items of profit
or loss including those which might be regarded
as non-trading or exceptional in nature and which
might be considered to distort
any view of underlying or maintainable performance.
FRS3 EPS are of primary interest to see how they
compare with normalised EPS. Frequent major discrepancies
can give rise to worries that creative accounting
might have been at work.
Normalised EPS are calculated by taking
reported results as a starting point and then
excluding any items which are exceptional, abnormal
or non-recurring in nature together with any non-trading
profits and losses.
Analysts of growth stocks place most reliance
upon normalised EPS and the trend of them is the
main point of interest. Where there are brokers'
forecasts, the normalised EPS figures are inserted
for the two years ahead, so it is possible by
studying the normalised EPS line of figures
to see the trend of historic and future normalised
EPS over a seven-year period.
Normalised EPS Growth shows for each
period how much EPS have grown (or in the case
of forecasts are expected to grow) when measured
against the previous period. A minus sign indicates
negative growth. The trend of EPS growth is of
crucial importance to growth stock investors.
Tax rate shows the effective overall
rate of taxation provided against reported FRS3
pre-tax profit. It takes account of UK corporation
tax, deferred tax, overseas taxation, double taxation
relief and any unrelieved ACT write-offs. Prior
year tax adjustments are included within the
total tax charge when calculating the overall
tax rate.
The normal rate of corporation tax for UK companies
is 31%. If the taxation charge is substantially
less, this is probably because the company is
using tax losses brought forward. In this event,
the normalised EPS figures should be treated with
caution as once the tax losses are absorbed the
tax charge will revert to the full and normal
percentage, thereby reducing normalised EPS.
If the tax charge is substantially higher than
normal it often means that a significant part
of the company's profits stems from overseas countries
with high taxation.
Normalised price earnings ratio
expresses the current share price as a multiple
of the historic normalised EPS for the last financial
year and as a multiple of the forecast EPS for
the following two periods.
Price earnings growth factor (PEG) measures
the relative cost of earnings growth at the current
share price. It is therefore only relevant to
those shares which can truly be categorised as
growth companies.
The PEG factor is simply the prospective price
earnings ratio (the normalised PER) divided by
the prospective earnings growth rate (normalised
EPS growth).
Forecasts are given to show the outlook for the
PEG in the two years ahead. If the growth rate
is expected to fall substantially, the PEG will,
of course, rise as a direct result. A current
PEG may appear attractive today, but is often
much less appealing when examined in relation
to future growth rates and these always need to
be taken into account.
Provisional
PEG is calculated when the stringent
criteria for awarding a PEG are forecast to be
satisfied by the next set of preliminary results.
This presumption rests entirely upon the next
results matching the brokers' current expectations.
The idea behind showing a provisional PEG
is to anticipate a PEG being awarded and thereby
to steal a march on the market.
Cash flow per share is the volume of
cash (expressed on a per share basis) generated
by the trading operations of a business, out of
which dividends, capital expenditure and repayment
of loans must be funded.
Cash flow is one of the most important features
in the historic performance figures. I like to
compare it year by year with the normalised EPS
figures to make sure that the cash flow per share
exceeds EPS. A one year lapse can be understandable,
if, for example, a company is stocking up for
expansion, but a persistent shortfall is extremely
worrying and would put me off buying the shares.
Capex per share is the amount of cash
required to fund essential capital expenditure.
Expressed in per share terms it should be compared
with cash flow per share, which ideally should
exceed it by a substantial margin.
REFS has decided to exclude property purchases
from capex per share as they are usually discretionary
and could be leased or rented. The intention behind
this decision is to ensure that the REFS capex
figure reflects as nearly as possible the expenditure
essential to maintain
operating assets.
It
is good to see growth companies investing in capex
to promote genuine future expansion. The year
by year figures should, however, be studied in
detail to ensure that capex does not exceed cash
flow on a regular basis. The surplus of cash flow
over capex represents 'owner's earnings' made
famous by Warren Buffett. Like him, you want them
to be substantial.
Dividend per share is the total of net
declared dividends per share payable to registered
ordinary shareholders. Each historic period reported
is shown together with the brokers' consensus
estimate for the two forecast periods.
The detailed year by year figures show the trend
of past dividends and therefore give some idea
of the reliability of future ones.
Dividend per share (DPS) growth shows
for each period how much dividends per share have
grown or are expected to grow when measured against
the previous period. A minus sign indicates negative
growth. The comparisons are made on an annualised
basis.
Fast growing dividends per share are a major plus
for any stock.
Dividend yield is the annualised gross
dividend per share for the last reported period
expressed as a percentage of the latest share
price. The current yield may be paltry, but the
last two columns based on the brokers' consensus
forecasts show the future yields at the latest
price.
Dividend
cover is the ratio that expresses a company's
ability to pay ordinary dividends to shareholders
out of profits earned. It shows how many times
the ordinary dividend is covered by the profit
available.
The validity of the consensus dividend forecast
can be checked, to an extent, by examining the
dividend cover projections to ensure that the
prospective cover is at a normal level for the
company in question.
Balance
Sheet Information
The
last four lines of the historic figures panel
give very brief information about the company's
balance sheet.
Shareholders funds are the total of ordinary
share capital plus reserves plus preference capital.
Net borrowings are defined as gross borrowings
minus cash and near cash assets. A negative value
for net borrowings therefore indicates a net cash
position.
Net current assets are defined as current
assets minus current liabilities. A negative value
for net current assets therefore indicates net
current liabilities. Current assets include stocks
and work-in-progress, debtors, short-term investments
and cash. Current liabilities include short-term
borrowings, creditors, dividends and taxation
payable and accruals.
Benjamin Graham, the legendary US investment guru,
popularised a method of value analysis based upon
ignoring the value of any fixed assets and buying
shares at two-thirds of their net current asset
values. His approach was extremely successful
for many years, but nowadays it
is very hard to find any UK shares priced at net
current asset value and almost impossible to find
any priced at a discount. The basic idea behind
Graham's method is, however, very sound, so value
analysts should draw great comfort from very strong
net current asset positions.
Net tangible asset value per share (ntav ps)
is based on the information disclosed in the last
reported balance sheet at the end of each period.
Net tangible assets, defined as shareholders funds
attributable to equity interests minus intangibles,
are divided by the number of ordinary
shares in issue at the year end. The detailed
year by year figures also show the trend.
When
there are no intangible assets to be deducted
the ntav ps figure is the same as the nav ps shown
in the key statistics. |
REFS is
a mine of invaluable information for the private investor.
Historic And Forecast Performance
