Historic and Forecast Performance

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.

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