v2 Reports

Full tutorial on the analytics section of the v2 reports.

Per share figures

Per share figures seek to determine the amount of a line on the financial statements on a per share basis. This is useful for tracking these items across time – but more importantly in market ratios. For instance the P/E ratio which is price divided by EPS or NPAT per share, which gives an indication of how the market values the companies earnings – the reciprocal of this, the earnings yield similarly shows what sort of return you get at that share price. Another key one is DPS (dividends per share) as this can be used to determine the dividend yield. Also net assets can be used to get P/NA to see how the market is valuing the net assets of the firm.

 

• Dividend/shares
  =Dividends paid (from statement of cash flows) over number of shares (from notes to financial statements).

 

• NPAT/shares (EPS)
  =NPAT (Net Profit After Tax – see the statement of financial performance; this is the “bottom line”) divided by over number of shares (from notes to financial statements).

 

• EBITDA/shares
  =EBITDA (Earnings Before Interest, Tax, Depreciation, & Amortisation – see the statement of financial performance; this figure is commonly used to assess the underlying profitability of the firm, ignoring effects of capital structure, this is commonly used in valuations and is thrown around a lot in private equity discussions e.g. “EBITDA multiple”) divided by over number of shares (from notes to financial statements).

 

• Net Assets/shares
  =Net assets (total assets less total liabilities i.e. equity – see the statement of financial position) divided by over number of shares (from notes to financial statements).

 

Profitability

The following ratios are designed to measure the profitability of the firm, and through using different techniques, the nature of the profitability also. For instance ROA will give a gross level of profitability, which when combined with the equity multiplier (the leverage effect) gives the ROE figure, a more ‘net’ measure of profitability and return on capital. Meanwhile the net profit margin measures how well the firm can convert its revenue into net profits. The power of these ratios can be seen when they’re used to compare companies within the same industry or across industries as they can in effect ignore the differences in size. [note though differences in size may be entirely relevant, as it may have implications in terms of cost of capital, ability to grow assets, long term growth prospects etc]. In any case these ratios can be used in filter analysis so filter out the most profitable companies from a large universe of potential companies.

 

• ROA
  (Return on Assets) = NPAT divided by Total assets; (variations can include using average total assets, or average earning assets etc).

 

• Equity multiplier
  =Total assets divided by net assets (i.e. equity); this measure the firms use of leverage in a way that can be applied to the gross return metric ROA to produce the ROE figure. (Also note 1 divided by the equity multiplier (also called leverage multiplier etc), produces the equity to assets ratio… or percentage of equity (which is useful in WACC calculations; and is also used in banking e.g. regulatory capital ratios).

 

• ROE 
  (Return on Equity) = NPAT divided by Net Assets (alternatively = ROA times the equity multiplier). This gives the underlying return on equity, a measure that shows how profitably the firm is using its equity; it can also be used as a proxy for the cost of equity capital, and can be used in the dividend discount model.
  
  
• ROavgE
  (Return on average Equity) = NPAT divided by [(net assets in year 1 + net assets in year 2) / 2 ] i.e. NPAT over average equity of the year. This is essentially the same ratio as above but instead uses average equity, rather than equity take as at the balance date.
  
  
• Net profit margin
  =NPAT divided by total revenue. This ratio shows the % of total revenue that was converted to net profit; it shows how efficient the firm is at getting revenue to the bottom line. However it is best to compare across similar companies, as differing business models will produce different profit margins, e.g. super market versus jewellery store. So while this ratio is useful, it should be supported by more underlying figures such as ROE.
   

Liquidity

The following ratios are designed to assess the liquidity of the company, in other words, the ability of the company to meet its short term commitments as they fall due. This is an important aspect of risk management, and can be useful in determining a company’s probability of default or likelihood of insolvency. This is important for more conservative or prudent investors in equity – and for all investors in debt securities (i.e. lenders).

 

• Net working capital
  = Current Assets less Current Liabilities (see statement of financial position). This figure shows the net difference between current assets and liabilities.
   
• Current ratio
  = Current Assets divided by Current Liabilities. This figure measures the ratio of current assets to liabilities, which in essence is similar to net working capital, however this ratio is a common size figure, or it ignores absolute values so it can be used to compare across companies more easily. Again though this ratio will differ depending on the industry and business model, for instance banks and financial institutions mismatch the maturities of their assets and liabilities which is basically the process of intermediation – which is their raison d'être... and main source of risks and profits.
   
• Quick ratio
  = Current assets less inventory divided by current liabilities – this is the same ratio as above however it allows for the fact that inventory is generally a lot less liquid. An extension of this is to use the cash ratio which only includes cash and marketable securities, on the rationale that accounts receivable may also be misleading as a proxy for liquid/short term assets… especially if there is high credit concentration or slow conversion rates.
  
  
• Working capital ratio
  = net working capital over total assets – this measures net working capital as a proportion of total assets, essentially it is a common size ratio designed to compare working capital across companies.
  
  

Capital structure

The metrics in the capital structure section give insight into the capital structure of the firm i.e. how much debt and equity it uses to fund itself. These analytics are important in valuations and cost of capital calculations, yet they can also prove useful in credit analysis in terms of the likelihood of bankruptcy e.g. highly leveraged firm ceteris paribus versus a firm with little or no leverage. This section also contains the number of shares – an input in the previous per share figure section, and the dividend figure (which is then used to calculate the dividend payout ratio).

• Debt to equity
  = liabilities divided by equity (indicates the use of debt relative to equity, the higher the figure the higher the use of leverage, a similar ratio the equity multiplier also indicates this, however D/E ratio is widely used also)
   
• Interest coverage
  = EBIT (Earnings Before Interest & Tax) divided by interest expense (also called times interest earned, basically this ratio shows how well a company is covering its interest expense, in terms of credit risk this ratio is a good gauge – simply the higher the ratio the better able the company is to cover its interest payments (and hopefully principal also!).)
  
  
• Shares
  Number of common stock on issue, taken from notes to the financial statement. The figures used in our analysis are basic, but variations can include factoring in the effect of preference shares, warrants, convertible debt etc, to come up with diluted share figures or average figures.
   
• Dividends paid
  This figure is dividends paid, i.e. the amount of dividends that were paid over the financial year – taken from the statement of cash flows (under financing cash out flows), this is not the same as dividends declared, so there may be differing figures…
  
  
• Dividend payout ratio 
  = Dividends paid divided by NPAT (represents the proportion of profits paid out to share holders – the opposite of this is the retention ratio (i.e. 1-dividend payout ratio), the dividend payout ratio shows how much of the profits the shareholder can expect to receive in cash – while also revealing how much profits are reinvested into the firm… flowing on from that is the sustainable growth rate discussed in a later section).
  
  

Growth rates

Growth rates are simple calculations however provide insight into the change in figures across time – and because they are quoted in percentage terms they can be compared across companies and time. The first set of rates are standard percentage change, however the final one “g” is a different breed of cat – it’s actually an input to the dividend discount model, which may at some point be included in the analysis. In any case growth rates are a good way of looking into the past to see how well the company was able to grow across various categories… but also how stable it was e.g. a company with a 10% growth rate every year would be described as having stable growth whereas one that grew by 50% in year 1, but declined by –30% in year 2 (and so on) would be viewed as a little more volatile.

 

Rather than repeat it 5 times, the growth rate or percentage change can be calculated thus:
(Year 2 divided by Year 1) minus 1 i.e.  [(y2/y1)-1] or
(Year 2 minus Year 1) divided by Year 1 i.e. [(y2-y1)/y1]

 

• Revenue
  Measures the change in top-line/total revenue.
  
  
• EBITDA
  Slightly more useful than total revenue, this measures the change in operating profit of the firm.
  
  
• NPAT
  The change in bottom line profits, this gives the most underlying figure of the three financial performance growth rates, but it is useful to look across each of the three figures to detect outliers such as changes in one but not the other e.g. increasing expenses, changes in revenue patterns etc.
  
  
• Total assets
  Measures changes in total assets, this will obviously be of differing levels of importance depending on the firm, if the company is highly dependent on its assets to turnover a profit e.g. financial institutions then steady growth figures would be comforting to see.
  
  
• Net assets
  Net asset changes reflect changes in shareholder wealth, driven by either performance e.g. retained earnings, asset revaluations etc, or by other means such as capital raisings. Considering it is a good proxy for shareholder wealth it would be good to see positive figures here, however there is the issue of being able to reinvest the profits to achieve the same returns…
  
  
• g = (ROE*(1-DPR))
  This is also known as the sustainable growth rate, the key assumption behind it is that retained earnings can be reinvested to earn existing levels of ROE. This is “g” in the dividend discount model (which is Dividend in year 1 divided by the difference between the investors required rate of return (e.g. determined by the CAPM = rf+β(rm-rf)) and the sustainable growth rate [P0=D1/(k-g)].
  
  

Other

Below are a series of other metrics including market ratios and valuation multiples. The important thing to note is the share price used is from a past date, so depending when you’re looking at the report it may pay to recalculate the figures based on a more current stock price. In any case these analytics are important in determining value, for instance you may like a high dividend yield or earnings yield as a margin of safety, similarly you may want to filter out companies with low EV/EBITDA multiples. But of course with all financial analysis you need to look at the big picture, sure it may have a high earnings yield but then it could also mean that the market is pricing the company’s earnings quite low perhaps in recognition that future earnings levels may be uncertain, or because of any number of potentially negative factors.
 

• Share price
  This is simply the market price (last price a transaction occurred at) of the company, taken on the day indicated. Therefore any ratios that use this as an input are current as of the date indicated here.
  
  
• Market cap
  = Number of shares times the share price (this gives the total value of the company’s equity based on the market price of the shares, this gives and indication of the market value of equity (MVE) of the firm – however it is more a tool of interest than decision making as relying on this figure e.g. for a purchase of the company ignores the potential premiums one would have to pay during the process of accumulating stock in the company)
  
  
• Enterprise value (EV)
  = Total Liabilities plus MVE or market cap (other variations of this include taking the market value of debt, however we have opted to simply take the market cap as the MVE and total liabilities to produce this figure: EV is an alternative figure to market cap and can be seen as the takeover price as a buyer would have to also assume the company’s debt, EV is especially used in buyouts and can be used to produce two valuable ratios; EBITDA/EV and EV/EBITDA – both of which are explained below.)
  
  
• EV/EBITDA
  =Enterprise value divided by EBITDA (this is a valuation ratio and is useful in comparing how a company is valued by the market, but also it can be used to indicate the payback period (i.e. how many years it would take to payback the initial investment); meanwhile the reciprocal of this ratio EBITDA/EV shows the cash return on investment, this can be used to compare profitability across companies and as a basic decision tool e.g. if EBITDA/EV is greater than WACC (weighted average cost of capital) invest etc.)
  
  
• P/E Ratio 
  = price per share divided by earnings per share (this is similar to the previous ratio in that it is a valuation multiple based on earnings, however it focuses on net profit rather than cash profit, and only uses MVE – it is a commonly used figure in investing and can give a quick indication of how expensive the stock is. Higher P/E means a higher valuation – typically the market is pricing in the growth prospects of the company; value investors prefer companies with lower P/E ratios. The reciprocal of this ratio is the earnings yield, which is also explained below.)
   
• P/NA ratio
  = price per share divided by net assets per share (this valuation ratio instead values the company based on its net assets, thus using it you can assess how the market is valuing the company’s net assets, however in a world where cash is king this ratio can be somewhat meaningless as valuations are typically based on cashflows. However this ratio can be used to install a margin of safety e.g. by only considering companies that have a P/NA ratio lower than 1 (i.e. the price you pay is lower than the net asset value, thus in the event of bankruptcy –if- the NAV figure held true one would in theory have some net assets to back their shares); this ratio is most useful in looking at investment companies and property trusts.)
  
  
• Dividend yield
  = dividend per share divided by price per share (gives a gross return on investment figure based on price paid and dividends paid – assumes dividend payment will grow with the share price, this figure gives an indication of return on investment based on dividends, however it ignores total return, but can be useful in value investing and filtering – and decisions at the margin.)
   
• Earnings yield (E/P)
  = Earnings per share divided by price per share (i.e. the reciprocal of the PE ratio – this figure shows the underlying return the investor will get based on the price they would have to pay, however what happens with this return is a completely different story and relies on the management; the return can be used to buy back stock, be paid out as dividends, or be reinvested in the firm (among other things) – so the investor is at the mercy of the management to put this return to the most profitable use.)
   

4 yr Growth rates

This section is similar to the other growth rate section however this one measures the growth across 4 years, and is calculated rather differently:

 

Avg 4 yr growth rate
= (% change in year 2 + yr 3 + yr 4) divided by 3
It is a simple average of the % changes across the 4 years, it just gives a broad indication of % change, the other metric however is perhaps more appropriate;

 

Cmpdg 4 yr growth rate

= (figure in year 4 divided by figure in year 1) to the power of 1divided by 4) minus 1 i.e. [(y4/y1)^(1/4)-1]
This is the compounding growth rate, i.e. if the figure in year one grows at this rate compounding each year then it will end up as the figure in year 4.

 

So in essence they are two different ways of indicating growth rates over the last 4 years, and while they could be applied going forward to get some kind of indication of future potential… they are backward looking i.e. the past does not equal the future. If you are trying to assess future growth rates you need to factor in other variables such as growth prospects, industry and economic conditions, competitor analysis, investment projects, brand values, marketing strategy etc!

In other words while they can be useful, just be careful, and make sure your analysis doesn’t rely on one variable!

 

• Avg 4 yr growth rate (NPAT)
  Average growth rate across the years of NPAT (Net Profit After Tax). Simply the growth (or otherwise) of net profit across the years, ideally it should be growing…
  
  
• Cmpdg 4 yr growth rate (NPAT)
  Compounding 4 year growth rate of NPAT.
   
• Avg 4 yr growth rate (NA)
  Average growth rate across the years of NA (Net Assets or Equity), Simply the growth (or otherwise) of net assets across the years, as mentioned in a previous section this is a proxy for shareholder wealth so positive growth rates would be good.
  
  
• Cmpdg 4 yr growth rate (NA)
  Compounding 4 year growth rate of net assets.