1 ShareScope How investors evaluate company performance Tim Clarke General Manager, ShareScope
2 Stock markets Initial Public Offering Ltd v Plc Share ownership Control Accounts / reporting Money-raising Cost
3 Investing Superior returns Fund management Growth, Value, Income, Momentum
Your share of profits Yield / interest rate Dividend reinvestment Compounding 4 Dividends
Einstein described compound returns as the “eighth wonder of the world”. 5 Dividends
6 Compounding Bob’s Grocery Stores Plc Share price 100pHolding period 30 years Dividend 4pShare price remains unchanged Value of shares£ x 100p Income received£12004p x 1000 x 30yrs Investment value£2200£ £1200 Annual income£ x 4p Yield on cost4%4p / 100p
7 Compounding Initial value of shares£ x 100p Income received£0Dividends reinvested Final value of shares£ x 100p Annual income in year 30£ x 4p Yield on cost13%13p / 100p Bob’s Grocery Stores Plc Share price 100pHolding period 30 years Dividend 4pShare price remains unchanged
8 Compounding Initial value of shares£ x 332.5p Income received£0Dividends reinvested Final value of shares£69,335 Annual income in year 30£2754 Yield on cost83%£2754/ £3325 British American Tobacco Plc (BATS) 2 nd Jan 2000Share price = 332.5pDividend = 22.2p 2 nd Jan 2015Share price = 3522pDividend = 144.9p
9 Dividend Yield
10 Private Investors Merchant Banks / Fund Managers Stockbrokers SELL SIDEBUY SIDE Stock Market Structure of the market
Market capitalisation Share price x No. Shares e.g. Tesco Plc Share price = p No. Shares= 8,123,000,000 Market cap.= £17,809,677,500
12 Profits/earnings
13 Profits/earnings
EPS = Earnings per Share 14 Profitability
15 Profitability
16 Profitability
17 Minefield Continuous operations GAAP Exceptional items Practical considerations
18 Profitability
19 P/E = Market cap / Value Price EPS
20 Price/Earnings Ratio
21 Price/Earnings Ratio
22 Price/Earnings Ratio
23 PEG = PE / Earnings Growth PEG
24 Cash Flow & Liquidity
25 Dividend cover
26 Dividend cover
OM = Operating Profit / Turnover (Sales) 27 Operating Margin
28 Balance Sheet
29 Debt Gearing = Debt / Shareholder funds
30 Returns Return on capital employed (ROCE) Profit / Shareholder equity & Total borrowing
31 Returns
32 Returns
33 Problems with EPS Share buybacks Debt instead of equity
34 Discount/Premium to NAV
35 Discount/Premium to NAV
36 Discount/Premium to NTAV
37 City Expectations
38 City Expectations
39 City Expectations
40 City Expectations -16%
41 Was Tesco a good investment?
42 Stock Screening Search the stock market Use understanding of financial metrics to find attractive investment opportunities Criteria to use depend on the type of investor you are
43 Growth - Warren Buffett Capitalisation above £250m Exclude property stocks Below average PE in subsector EPS has increased in four out of the last five years Operating margin is trending upwards Net gearing below 100% Interest cover of 1.5 or more Cash flow higher than EPS ROCE of at least 12% for last three years ROCE trending upwards over last three years Ideally above average in sub-sector for most of PE, ROCE, Op margin, Net Gearing, Price to cash flow Stock Screening