The Key Statistics At the top right-hand side of each company entry is a shaded panel like this one: The panel is highlighted to catch your eye because the figures in it give you an instant fix on the company in question. They include key statistics to enable you to decide whether or not the company is of immediate investment interest. Price The price taken is the mid-market close on the latest possible day before going to press. When a rights issue is in progress, the shares are suspended or a company has made or received a takeover bid, the letters R, S or T will appear to the right of the price. The date and nature of the event are also shown in the ACTIVITIES/OUTLOOK panel under the graph.

The symbol NMS within the brackets means normal market size.
It gives an idea of the share's liquidity by showing the average trading quantity for the stock. NMS bands are in thousands with a lowest level of 500 and a highest of 200,000. REFS shows these two levels as .5 and 200 respectively and always takes off the last three noughts. For example, 'NMS 5' indicates an average market trade of between 3751 and 6667 shares.

The complete table of NMS Band levels is as follows:

MARKET CAPITALISATION (market cap)
The 'market capitalisation' of a company is calculated by multiplying the market price of its ordinary shares by the number in issue. It gives an instant idea of the size and substance of a company.

POSITION
This shows the current position of the company within the market overall, after ranking all fellow constituents including investment trusts.

INDEX
Each share is included in one of the following six categories and ranked according to its position. The table below summarises the distribution in June 1998:-

NORMALISED EARNINGS PER SHARE (norm eps)
The most important feature of the EPS entry in REFS is that it is not a reported figure but, where possible, a rolling 12-month view of expected earnings over the next year. Because of this, it changes every month and gives a dynamic, up-to-date view of a company's future profitability.

Whenever future estimates are available, REFS focuses on the 12 months immediately ahead and this is indicated, in brackets, by the letters 'pr' (denoting prospective). If no forecast is available, historic figures based on the last reported 12 months results are used.

The prospective normalised EPS figure is calculated by apportioning brokers' consensus forecasts for the current and next financial periods. For example, if the calculation were made on 1st March 1998, for a company with a financial year ending on 30th June 1998, a third (four months) of the consensus estimate for the current year would be added to two-thirds (eight months) of the estimate for the following year ending 30th June 1999.
The 12-months ahead method of calculation used in REFS has three important advantages:-

1. The company entries and tables are always as up-to-date and dynamic as possible.
2. The figures in the tables are always as comparable as possible.
3. The figures in the tables (and the company entries) are smoothed to avoid violent swings in ranking in the tables on the day results are announced.

In response to the introduction of Financial Reporting Standard 3 (FRS3), several different versions of EPS have evolved. The most useful of these, from an investor's point of view, is normalised EPS, which has been adopted by REFS in the key statistics panel.

The key differences between FRS3 EPS and normalised EPS are that normalised EPS exclude exceptional items and possess three important characteristics:-

1. They reflect the underlying trading performance of the company.
2. They can be used as a measure of performance against expectations.
3. They clarify the historic record of the operating performance of a company.

The main limitation of normalised EPS is that they reflect the results achieved during a given accounting period, although the company's structure may have changed subsequently.
For example, normalised earnings include the results of trading businesses which have been discontinued or sold and include only part of the results of businesses acquired during the year.

TURNOVER
Turnover is the total sales (excluding VAT) of a company as shown by the last annual report (AR) or by the preliminary announcement of results (PA) for the following year.

Turnover gives an immediate indication of the size and stature of a company.

PRE-TAX PROFITS
Pre-tax profits are the total profits of a company before tax as shown by the last reported accounts (AR) or by the preliminary results (PA) for the following year.

THE MOONS
Any statistic has little value unless it is examined in relation to other statistics of a similar nature. Clearly, the most relevant comparisons are with the average of the whole market (first column - M) and with the average of other companies in the sector (second column - S).

The moons should be used as gauges to show at a glance if a company's ratios or percentage returns are good news or bad. The moons are calibrated to show the position of a company in the market as a whole and in its sector. The key point is that the blacker the moons the better the statistics. In other words, in REFS - black is beautiful.

To give an example, full black moons against the PER would mean that the PER was the lowest in the market and in its sector. Blank moons against return on capital employed would mean that the returns were the worst in the market and the sector. If a company was in a sector containing twenty companies and it held the fifth best position for a particular statistic, the relevant moon would be three quarters black.

The statistics are grouped together. The PER, PEG, GR, ROCE and MARGIN are all growth statistics, whereas the PBV, PTBV, PCF, PSR and PRR are all value statistics. This makes it possible to see at a glance from a cluster of black moons whether a share is an attractive growth company or an asset situation.

DIVIDEND YIELD (DY)
The dividend yield is an important investment tool. There is very strong evidence to support the argument that high-yield portfolios outperform the market as a whole:-

1. During the 20 years from 1977 to 1997, £s;1000 invested in the average UK Growth unit trust, with dividends reinvested, grew to £s;18,184; in the UK Growth & Income sector the comparable figure improved to £s;20,343 and in Equity Income to £s;20,572. The best growth fund grew to £s;33,829, the best growth & income fund to £s;33,609 and the best income fund to £s;33,646 (figures by Micropal).
2. Michael O'Higgins' book, Beating the Dow, clearly demonstrates that, on a total return basis, high yielding stocks beat the American market as a whole. One of O'Higgins' systems simply selects the ten highest-yielding Dow stocks. At the end of each year he repeats the whole exercise again, selling those companies that no longer measure up and replacing them with new high-yielders.

O'Higgins' statistics show that, by following this system over a period of 18 1/2 years from 1973 to 1991, an investor would have enjoyed an average annual gain of 16.61% compared with only 10.43% on the Dow. The ten stock portfolio outperformed the Dow 13 times out of 19. After adding dividends received, but with no charge for commissions, the cumulative gain before tax was more than 1750% against only 560% on the Dow.

One reason high-yielding shares outperform the market on a total return basis is that they are usually companies that are out of favour. The stockmarket over-reacts to good and bad news, often driving up the prices of growth shares to dizzy heights and leaving less popular (and apparently more risky) stocks to languish at bargain levels. In essence, therefore, buying high-yielding shares contains a strong element of contrary thinking.

Another reason high-yielding shares do well is advanced by O'Higgins. He points out that, historically, dividends have accounted for 40% - 50% of the total return on the Dow, so a higher annual payout represents a significant cumulative advantage to shareholders.

In the UK too, the 1994 BZW Equity-Gilt Study made it clear that over the previous 75 years dividends have accounted for about 42% of the nominal total return on equities. Because UK companies do not cut dividends lightly, they are also a much firmer element of total return than share price growth based on potentially volatile earnings.

There is another possible reason for high-yielders being relatively strong performers. When analysts examine a share and assess its likely future value, say a year hence, not all of them factor into the equation the extra income that is likely to be received in hard cash and could be reinvested. In some cases, it is a significant factor which is only too easy to overlook.

The arguments for buying the shares of high-yielding companies are compelling. But it is worth pointing out that there is a definite cyclicality in buying high-yielding shares. In a climate of falling interest rates, they perform well as investors become more income-conscious. However, this can easily change.

It is a dangerous game to buy shares just because they appear to have a high yield. A high yield can indicate the market's concern that the dividend may be cut. To be selective, investors following a high-yield system should avoid companies with dividends that are very poorly covered, or for other reasons seem likely to be reduced.

To help assess the risk of a dividend cut, a range of important factors is highlighted in other panels of each company entry:

1. Dividend cover - A dividend that is poorly covered is much more likely to be cut. A well-covered dividend is likely to be maintained or increased.
2. Cash flow per share - EPS provide cover for the dividend in terms of profits, but cash flow per share is a stronger test of future dividend-paying capacity.
3. Gearing or net cash - Companies with very high borrowings may have difficulty in paying dividends, even if they make substantial profits. Major creditors can press for repayment and balance sheets may need to be repaired before dividends can be freely paid.

Clearly a company with a strong dividend cover, high cash flow per share and net cash is unlikely to cut its dividend. Conversely, a company with poor dividend cover, weak cash flow and high gearing is very likely to do so.

To ensure that REFS is as up-to-date and active as possible, the dividend yield is based on the consensus of brokers' dividend estimates for the 12 months ahead. As with EPS, this is usually a combination of forecasts for the current and following financial years, apportioned on a pro-rata basis. For example, in the October issue of REFS, the yield for a company with a year ending 31st December includes three months of the consensus forecast for the current year and nine months of the following year's estimate.

When future estimates are available, this is indicated by the letters 'pr' in brackets, and the dividend yield is based on the consensus of brokers' forecasts for the 12 months immediately ahead. If there is no forecast, historic figures based on the last reported 12 months results are used.

As already explained, the method of calculation used in REFS ensures that the company entries are as up-to-date and dynamic as possible.

The first stage of calculating the dividend yield is to add back the basic rate of tax (1998/99 - 20%), which has been deducted by the company. Assuming a 2.1p dividend, the calculation is as follows:-

2.1p x 100	= 2.63p, which is the gross dividend
80 (100-20)

The dividend yield is the gross dividend as a percentage of the share price. If the shares trade at 200p, the calculation is as follows:

2.63p (the gross dividend) x 100	= 1.31%
200p (the share price)

The first column of moons indicates the level of the dividend yield relative to the market as a whole, and the second column relative to the company's sector. A full black moon shows a relatively high dividend yield and a blank moon a relatively low or non-existent one.

PRICE-EARNINGS RATIO (PER)
As an investment measure, the Price-Earnings Ratio (PER) is, in many ways, like a ranging shot. It gives an investor an instant fix on the kind of company that is under review and the market's expectations.

The PER is best used to measure how much an investor is being asked to pay for future earnings. A growth stock with a higher prospective PER than the market average clearly anticipates above average future earnings growth. Conversely, a growth stock with a low PER expects below average future performance.

Very high PERs can be dangerous. The slightest setback to expectations can cause a vicious downturn in the share price. In contrast, low PER stocks are relatively safe, although often uninspiring. Utilities, for example, often trade on very low PERs.

Recovery stocks often command very high PERs at the bottom of their cycle when a substantial recovery is anticipated. At the top of the cycle, their PERs can then fall to below-average levels. Because of this, great care should be taken when comparing the PERs of companies in different sectors.

The weakness of the PER in isolation is that it does not tell you how much you are paying in relation to the estimated future growth in earnings. It is therefore a one-dimensional measure. For example, how much should be paid for a stock growing at 40% per annum compared with another growing at 20% per annum? The price earnings growth factor PEG pinpoints the relationship between the PER and the growth rate, making it a far more pertinent and effective investment measure.

REFS has focused upon the 12 months immediately ahead as the most dynamic and useful measure of a company's PER. As already explained, the prospective normalised EPS figure is calculated by apportioning estimates from the current and following financial periods. For example, if the calculation was made on 1st April 1998 for a company with a year ending on 30th June 1998, a quarter of the estimate for the current year would be added to three-quarters of the estimate for the year ending 30th June 1999. As the prospective PER in REFS is based on the prospective normalised EPS figure, it will always cover the 12 months following the calculation date.

The method of calculation used in REFS ensures that the company entries are as up-to-date and dynamic as possible. When future estimates are available, this is indicated by the letters 'pr' in brackets and the PER is based on the consensus forecast for the 12 months immediately ahead. If there is no forecast, historic figures based on the last reported 12 months results are used.

The PER is calculated by dividing the company's share price by its earnings per share (EPS). For example, if the share price of a company is 100p and its earnings per share are 5p, the PER is 20.

In May 1998, the average UK company had an historic PER of approximately 19 and, after forecast growth, a prospective PER of about 15. The forecast growth may seem to be substantial, but in fact a large element of it was anticipated recovery from previous setbacks as opposed to pure growth. Individual companies making up the market average of 15 had PERs ranging from 3 to over 150, but the vast majority were between 10 and 30.

The moons show the PER of a company relative to the market and then relative to its sector.

PRICE-EARNINGS GROWTH FACTOR (PEG)
As we have seen, the PER of a company is of limited use as an investment tool because it only gives a one-dimensional measure of the price of a share relative to future earnings per share; it does not show if that price represents good or bad value.

The Price-Earnings Growth factor is a much more sophisticated measure because it relates the PER of a company to its future earnings growth rate and gives a better indication of value. Everyone knows that great growth shares merit a high PER, but the PEG helps you to determine how high and whether or not the shares are a buy or are losing touch with reality.

The PEG factor is calculated by dividing the prospective price-earnings ratio of a share by the estimated future growth rate in earnings per share. In May 1998, for example, the average UK share had a prospective multiple of 15 and was looking forward to increased year-ahead earnings growth of 8%. The average prospective PEG was therefore 1.9 (15/8). A low PEG value indicates that investors are paying a relatively low price for future earnings growth; a high PEG indicates that the shares are relatively more expensive.

A PEG below the average is superficially attractive, but the market is at a high level so when searching for bargains subscribers should be focusing on shares with PEGs of below one.
Over the long term, it has paid to buy the market on a PEG of one or below. Because of this, a company growing at 15% per annum would obviously be very appealing on a multiple of 15 or less. At a growth rate of 20% per annum, a multiple of 20 would also be good value.
Because the prospective PEG is a dynamic measure, it is always calculated by apportioning figures from the current and following financial periods using estimates in just the same way as for prospective PERs and normalised prospective EPS. When a PEG is based on the consensus forecast for the next twelve months, this is indicated by the letters 'pr' in brackets. If there is no forecast, historic figures based on the last twelve months are used.

As already explained, the method of calculation used in REFS ensures that the company entries are as up-to-date and dynamic as possible. How the PEG method works is best illustrated by the hypothetical example of a company growing at 25% per annum on a prospective PER of 16. This would give a very attractive PEG of 0.64. When the forecast becomes a reality, and next year's projected growth of a further 25% becomes the focus of attention, the shares then enjoy a double benefit. First, from the higher earnings figure used in analysts' calculations and, second, from a change in status as the market accepts that a higher PER is justified. At an early stage in the company's development, the PER might rise from 16 to 20, so the earnings gain of 25% would be compounded by a further 25% increase from the status change, resulting in a total gain of 56.25%.

To illustrate the dramatic impact this can have on the share price, imagine that before the announcement of results, expected earnings of 10p per share and a PER of 16 implied a price of 160p. After the announcement, the higher PER of 20 on forecast earnings of 12.5p would result in a share price of 250p.

In addition to helping to maximise the upside potential from a share, the PEG can also be used as a defensive measure. A company with a below average PEG is obviously less vulnerable (all other things being equal) than a share with an above average PEG. It is therefore worthwhile periodically calculating the average PEG of a growth portfolio to evaluate how defensive it would be in a bearish climate.
There are a number of important caveats to bear in mind:-

1. The PEG factor is designed especially to measure growth stocks. It does not work well for recovery stocks, cyclicals and asset situations.
   Frequently, it is difficult to distinguish between recovery and growth. For the PEG measure to work at its best, the figures should be based on sustainable growth or the expectation of it. Coming out of a recession, almost all companies are recovering to a greater or lesser extent. However, those with a record of consistent growth over the previous four years are very different from companies which have suffered from a major setback and are trying to recover to their former profit levels.
   REFS has classified companies as growth stocks and awarded them a PEG only if they have at least four years of consecutive earnings per share growth. This can be either in the last four years if there is no forecast, or a combination of past growth (usually two years) and future forecast growth (usually the current year and the one ahead). The REFS approach is dynamic as it allows companies that are benefiting from a recent management change to qualify for a PEG. A quick visual impression can also be obtained from the graph, which clearly shows whether or not a company is a growth share under this definition.
2. A low PEG factor is, by itself, not a sufficient reason to buy a share. Although compromises are often necessary, the selected company should ideally have a competitive advantage, strong cash flow, insignificant debt and positive news-flow.
3. The PEG method of selecting growth stocks works at high levels of growth, but the dangers of high PERs are much greater. For example, a share growing reliably at 30% per annum would, in today's markets, merit a PER of at least 30. Growth at such a high rate is not, however, usually sustainable, so the downside risk is increased. The effects of a change in news-flow, even from excellent to reasonably good, could have a disastrous effect on a stock with a high PER (especially if it has no dividend yield).
   The PEG measure works at its best with companies which have earnings growing at 15 - 25% per annum, with PERs within five points either way of the average. Based on the average prospective PER of 15, the best and safest results would be obtained with growth stocks with PERs in the 12 - 20 bracket.
4. PEGs are calculated on normalised earnings. The earnings forecasts are based on consensus figures obtained from a very large number of UK brokers. These figures are updated monthly, but the reliability of their consensus forecast (and therefore the PEG) is much enhanced if a large number of brokers are covering the company. The forecast is also more reliable if there is a small difference between individual estimates and the overall consensus figure.
5. Brokers' estimates of future EPS may be based on the assumption that the company will have a below-normal tax charge. In some cases it may enjoy this benefit for several years to come; in others EPS may suffer a setback as the tax charge rises to a normal level.

As with other investment criteria, the PEG cannot be considered in isolation. However, it is the single financial statistic that gives an instant fix on whether growth shares appear to be cheap or dear.
The column of moons shows the PEG relative to the market and the company's sector. A full black moon shows a very low PEG, a half-filled moon an average one and a blank moon a very high one.

GROWTH RATE (GR%)
The growth rate of a share is an important investment criterion, but it clearly has to relate to the prospective PER and the consistency and sustainability of the future earnings stream. If REFS has given a company a PEG, this means that there are at least four years of consecutive earnings growth made or forecast. The company can then be classified as a growth share and the growth rate becomes a much more meaningful figure.

When future estimates are available, these are indicated by the letters 'pr' in brackets and growth rates are based on the consensus forecast for the 12 months following the calculation date.

If no future estimates are available, the growth rate is based upon the average growth in historic normalised EPS over the last two years. However, if the growth in the second year is less than the first, the second and most recent year's EPS growth is used instead.

As with normalised EPS, PERs, PEGs and DYs, the growth rate is calculated by apportioning the figures from the current and following financial periods covered by estimates, the aim being to show the rate of growth for the 12 months immediately ahead.

RETURN ON CAPITAL EMPLOYED (ROCE)
The ROCE is calculated by expressing the operating profit before tax as a percentage of the year-end capital employed.

The main features of ROCE as an investment measure are as follows:-

1. High ROCE (in the region of 20% or more) is a validation of a company's competitive advantage. It indicates that the company has something special to offer - products or services that command a high return. It usually follows that margins are above average. The trend of both capital employed and margins is, therefore, of considerable importance.
2. Comparison of the ROCE of a company with others in its sector is a far more pertinent measure than comparison with the market as a whole. Companies with low returns are always suspect because they are in danger of becoming loss-making if trading conditions deteriorate. Companies with exceptionally high returns may invite competition for their products or services, unless they are fully protected by patents or in some other way.
3. The ROCE of a company should always be compared with the current cost of borrowing. If the ROCE is significantly higher, further borrowing adds to EPS; if the ROCE is lower, further borrowing will reduce EPS.
4. Companies with low ROCE are often the subject of changes in management control which, in turn, are frequently followed by a rights issue. The most acid test of new management is whether or not it is able to lift the return on capital employed.
5. The obvious attraction of a high ROCE is that a greater than average amount of profit can be ploughed back into the business for the advantage of shareholders. The plough-back is then employed again at the higher than average rate and helps to generate further growth in EPS. For this reason, a high ROCE is usually a common denominator of great growth stocks.

ROCE has not been calculated for banks and insurance companies. The ROCE of most property companies and of some financial companies should be viewed with caution, as the statistic may not be particularly meaningful.

Capital employed is the sum of ordinary and preference share capital plus reserves, debentures, loan stocks, all borrowings including obligations under finance leases, bank overdraft, minority interests and provisions. Deductions include investments in associated companies. The basic idea is to arrive at a final figure that will tell you how much money (whatever the source) is being employed in the operation of a business. The resultant figure is then compared with the operating profits before tax, exceptional items, interest, dividends payable and share of profits or losses of associated companies. The percentage this figure bears to adjusted capital employed gives investors a measure of the return the business can produce on the capital employed within it.

A significant problem arises with goodwill, brand names, patents, copyrights, newspaper titles and the like. There is no doubt that intangible assets can be immensely valuable, but the accounting treatment of them can vary considerably. For example, brand names sometimes have no value in the balance sheet and, at other times, they are written up in value to a significant proportion of the net assets. The difficulty is that no fair value can really be established unless a competitive auction tests the market. Any valuation made by the board is essentially arbitrary and, therefore, subjective.

In REFS all intangibles are excluded. This treatment has the following advantages:-

1. It is consistent.
2. It measures the operating efficiency of a business by comparing operating profits with operating assets.
3. It does not change the operating efficiency of a business being acquired. For example, an acquiring company may pay double tangible asset value for a business. If the resultant goodwill were left in the balance sheet, this would halve the ROCE of the business in the accounts of the acquiring company. In fact, the operating efficiency of the business acquired would remain unchanged and this is reflected in the REFS figures which exclude goodwill.

The REFS approach of excluding intangibles is flattering to very acquisitive companies that might be over-paying for the businesses they acquire. The writing-off of the goodwill paid for businesses acquired will result in higher returns on capital employed in the accounts of acquiring companies. The high returns are being made by the operating assets, not on the purchase consideration (including goodwill) paid by the acquiring companies. This should be borne in mind when judging the ROCE of conglomerates and other particularly acquisitive companies.

MARGIN
Margin is the ratio of operating profit to turnover. For example, a company with operating profits (trading profit before tax, interest and associates' contribution) of £s;10m and a turnover of £s;100m has an operating margin of 10%. Generally speaking, a high margin is a good sign.

For the purpose of calculating margins, REFS defines operating profits as trading profits before tax, interest, other investment income and any share of associated company profits. Capital profits and losses, and other exceptional items, are also eliminated.

A company's operating margin is a vitally important investment statistic that links price-to-sales ratios and price-earnings ratios. Increasing sales are of much less value if margins are falling drastically. If margins are being maintained or are expanding, they quickly translate into increased net profits.

The figure in the key statistics panel gives the operating margin based on the last full year's accounts.

There are a number of caveats to bear in mind when considering margins as an investment measure:-

1. Very high margins invite competition. Unless the barriers to entry are very strong, other companies will be attracted to the industry. Ideally a company will combine high margins with products or services that are 'unique' and difficult to emulate; well-patented products are a good example.
2. Very low margins add to the risk of any investment. A small fall in sales can have a disproportionate and sometimes disastrous effect on profits. Equally, the slightest upward movement can have a very beneficial effect.
3. Companies with a history of low margins, in industries that have become used to them, find it very difficult to increase their margins. Treat with scepticism extravagant claims about future increases in margin.
4. The significant improvement of margins is usually based upon some kind of product or service enhancement. Try to identify these from press cuttings or brokers' circulars.
5. Major changes in margins frequently occur as a result of new top management. The recent record of margins should therefore be looked at in this context.
6. Very choppy margin records usually indicate businesses in industries that are subject to periodic price wars and/or are very cyclical. Beware of buying into such a company during a period of very high margins, unless there is very strong evidence that it will be different this time around.

The columns of moons show the margin relative to the market and the company's sector. A full black moon shows relatively high margins, a half-filled moon average ones and a blank moon relatively low margins.

NET GEARING (GEAR)
A strong cash position is a clear advantage for a company; conversely, excessive gearing can be dangerous and can at times threaten a company's survival.

As a guideline, net gearing of over 50% calls for further investigation. This is especially the case if a large proportion of overall borrowings are short-term. A highly-geared company is more vulnerable to changes in interest rates. It is also more vulnerable to a sudden recession or unexpected major strike, as it is more likely to be fully invested and committed operationally.

If the net gearing percentage is worrying, the sector moon should be checked to ascertain the norm for the industry.

The net gearing figure in the key statistics is calculated by taking the total borrowings less cash, treasury bills and certificates of deposit, and expressing the resultant figure as a percentage of shareholders funds including intangibles, such as brand names, copyrights and goodwill. Note that the cash figure does not include marketable securities as they may be difficult to realise in an emergency. A minus sign indicates negative net gearing and denotes a net cash position (also expressed as a percentage of shareholders' funds including intangibles).

A much fuller explanation of the method of calculation and the implications of gearing is set out under GEARING, COVER.

PRICE-TO-BOOK VALUE (PBV)
The PBV is obtained by dividing the share price of a company by its net asset value per share. The same result is, of course, obtained by dividing the company's market capitalisation by its net assets.

The difficulty with PBV as a meaningful investment criterion is defining the word 'value'. Copyrights, patents and brand names, for example, can be worth little or nothing, or many times their cost or book value. No fair value can really be established unless a competitive auction tests the market. Any valuation made by the board is essentially arbitrary and subjective.

A further problem is that companies treat intangible assets in different ways. Some revalue them in their balance sheets, others write them off completely or in part, immediately or over a period. Comparisons are therefore difficult to make and stark figures can be misleading.

Other more tangible assets such as plant and machinery, factories, office buildings, hotels and the like, can also have dubious value. For example, specialised machines that may soon become obsolescent, and factories in the middle of nowhere, are impossible to value accurately. Valuations of assets like these tend to be subjective and book values are often far removed from the underlying true worth.

Benjamin Graham, the dean of value investing, makes the general point that it is unwise to buy a share at a price above its book value. Conscious of the difficulty of valuing most fixed assets, he preferred to buy at two-thirds of current net asset value, taking no account of assets like factories and machinery and after deducting all debt. However, in his time, Graham was spoilt for choice and few such extreme bargains exist today.

In general terms, PBV is a primitive investment measure that can at times provide a small degree of comfort to shareholders in a company. If the book value is well in excess of the share price (a low PBV) it can also point to the possibility of a takeover; however, quality of the assets is all-important.

Jim O'Shaughnessy, in his book What Works On Wall Street, reviewed 40 years of data from the Standard & Poors COMPUSTAT database - 1954-1994. He found that stocks with a low PBV gave an above average annual return of 14.38% against the market average of 12.45%. Conversely, stocks with a high PBV gave a poor return of only 7.47%.

PRICE-TO-TANGIBLE BOOK VALUE (PTBV)
The PTBV is obtained by dividing the share price of a company by its net asset value per share after deducting intangibles. The same result is, of course, obtained by dividing the company's market capitalisation by its tangible net assets.

Because of the arbitrary nature of assets like copyrights, patents and goodwill, REFS provides this harsher measure of a company's net asset value. Excluding all intangibles has the additional advantage of being consistent, so that inter-company comparisons can be made on a more even footing. The resultant figures should be treated with caution because, in some cases, the intangible assets (that have been deducted) will have a tremendous value, whereas in others they may be worth very little. Also, even the tangible assets may be of questionable value.

PRICE-TO-CASH FLOW (PCF)
The PCF of a company indicates how much annual cash flow you are buying per share. A high PCF shows that cash flow is slim in relation to the share price. Conversely, a low PCF is usually very attractive. If the PCF is much higher than the PER, the causes of the difference need to be established.

From an accounting point of view, a company's ability to pay investors an increasing flow of dividends is determined by its profitability. In practice, however, a more important measure of its financial health is its cash flow.

The PCF, in itself, does not indicate a strong cash flow; it simply tells you if the share price is high or low in relation to it.

A company's net cash flow has to fund the following:-

1. Repayment of any loans
2. Future capital expenditure
3. Dividends on ordinary shares.

Cash flow is a key measure of the capacity of a business to service these requirements, helping to highlight:-

1. If creative accounting has been at work. (This is determined by seeing if there is a major disparity between the trend of cash flow and EPS on a normalised basis, i.e. excluding non-trading profits and losses).
2. If the future dividend is safe. Earnings are usually more volatile than cash flow and there is a greater relationship between cash flow and dividends than between cash flow and earnings.
3. Future liquidity and gearing. Cash flow is the raw material that will be used to pay off debts and improve liquidity. Without an adequate supply, gearing will increase and liquidity will deteriorate.
4. If a company has been over-trading. If earnings per share are expanding rapidly and cash flow is shrinking, this can indicate over-trading; for example, excessive funds may be locked up in growing debtors. This, in turn, raises the question of whether credit policy is too lax or customers are unable to pay.
5. If future expansion plans and proposed capital expenditure can be funded from within. This, in turn, is a kind of cross-check on the validity of a high PER linked to expansion plans and capital expenditure.
   Capital expenditure requires special attention. It is accepted as an appropriation rather than as a charge against cash flow. However, in some cases capital expenditure is necessary for the continuance of a business (e.g. the replacement of old machines with new ones for the same purpose).
   Capital expenditure on brand new machines for a new and additional factory is quite another matter. Unfortunately, it is not possible to distinguish readily between capital expenditure on expansion and on necessary replacement. Investors should, therefore, keep an eye on the level of capital expenditure each year and try to determine from broker and press comment how much of it is expansionary (as opposed to necessary replacement).

PCF is calculated by dividing a company's market capitalisation by its cash flow. In REFS, cash flow is derived from the Cash Flow Statement, which is a mandatory requirement imposed by the Accounting Standards Board.

The Cash Flow Statement splits cash flow into different categories and classifies sources of movements into their economic causes. Headings include Net Cash Inflow from Operating Activities and this figure must be reconciled with operating profits. Apart from depreciation and associated company profits, the main additional items are increases and decreases in stocks, debtors and creditors. A typical reconciliation might be as follows:-

		£s;000
Operating profit		1000
Depreciation		100
Increase in stocks		(10)
Increase in creditors		50
Decrease in debtors		40
NET CASH INFLOW FROM OPERATING ACTIVITIES		1180
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received	100
Interest paid	(250)
Interest element of finance lease rentals payment	(40)
Dividends received from associated undertaking	60
Dividends paid (excluding ordinary dividends)	(20)
Net Cash Outflow From Returns On Investments
And Servicing Of Finance		(150)
TAXATION
UK corporation tax paid	250
Overseas tax paid	30
		(280)
NET CASH FLOW		750

If the company's market capitalisation was £s;15.0m, this would mean that the PCF was

£s;15.0m	= 20
£s;750,000

Jim O'Shaughnessey, in What Works On Wall Street, found that during the period 1954-1994, stocks with a low PCF gave an average annual return of 13.58% against a market average of 12.45%. Conversely, stocks with a high PCF gave a very poor return of only 6.80%.

PRICE-TO-SALES RATIO (PSR)
The PSR is an invaluable tool for spotting recovery situations, especially with companies that are making losses and are therefore in a kind of 'black hole'. When this happens, there is no PER and sometimes no dividend yield against which to value the shares. The PSR then comes into its own and provides a measure of a business's potential value, if and when it recovers. All other things being equal, a share with a low PSR is obviously better value than one with a higher PSR.

Needless to say, turnover is only valuable to a business if it can eventually be converted into profit. Contracting companies, for example, report very high turnover, but, except in building booms, rarely make much profit. Profit margins, the trend of margins, and sector comparisons should, therefore, be studied in conjunction with PSR statistics. Sector comparisons often reveal interesting anomalies and investment opportunities in particular industries.

Another important and variable factor is the level of a company's debt. A company with no debt and a low PSR is clearly a better proposition than a company with very high debt and the same PSR. At some time in the future, the debt will need to be repaid and further equity will almost certainly be issued. The extra shares then have to be added to the market capitalisation, increasing the PSR of the company in question.

It follows that gearing should be at reasonable levels to make PSR comparisons valid. Otherwise notional allowances need to be made to allow for the likely issue of further equity. The method of calculating the allowances would, of course, have to be consistent between the companies compared, but certainly the PSR should not be taken at its face value for a company that is very highly-geared.

Many investors are used to looking at the market capitalisation of a company against its sales and are used to referring to sales as being a multiple of the market capitalisation. The PSR is the inverse of that ratio, and is used to be consistent with, and to make comparisons more valid with, the other ratios used in REFS.

The PSR is calculated by dividing the company's market capitalisation by its total sales, excluding VAT. This is the same as dividing the company's share price by the company's sales per share.

To take a simple example, in March 1991, Next had a market capitalisation, based on a price of 30p, of £s;100m and sales of £s;400m. The PSR was therefore a very attractive 0.25 -£s;100m/£s;400m, and it is no surprise that, with new management, by August 1994 the share price had recovered to 261p.

It is interesting to note that Next still had such a low PSR even after the sale of Grattan, when some kind of recovery was foreseeable. Prior to that, in December 1990, its market capitalisation had slumped to £s;24m against forecast sales, including Grattan, of £s;800m. The PSR was therefore an astonishingly attractive 0.03, although, at that stage, recovery was very difficult to foresee.

A low PSR is one of the best value measures, preferable in my view, to a low PBV. Kenneth Fisher, the American ace investor, in his excellent book Superstocks, writes about the PSR at length and believes it to be the most powerful single investment measure. Jim O'Shaughnessy, in What Works On Wall Street, found that during the period 1954-1994 stocks with a low PSR gave one of the best annual returns of 15.42% against the market average of 12.45%. Conversely, stocks with a high PSR gave a very poor return of only 4.15%.

PRICE-TO-RESEARCH AND DEVELOPMENT RATIO (PRR)
The PRR is only a useful measure for companies which engage, as a way of life, in a substantial amount of research and development expenditure every year. Companies in pharmaceuticals, electronics, bio-tech and computer software are typical examples. The PRR will, therefore, only be shown in company entries where there has been research and development expenditure of over 1% of market capitalisation as shown by the latest Annual Report.

The PRR is obtained by dividing the market capitalisation of a company by the total research and development expenditure. This is the same as dividing the share price by the research and development expenditure per share. For example, if the market capitalisation of a company is £s;200m and the research and development expenditure is £s;5m, the PRR is 40.

The PRR provides a quick and easy check on the relative amounts being spent on research and development by different companies in the same sector. It is also helpful as an investment measure if a company is making losses and is in a valuation 'black hole'. On occasions, the PRR can provide startling evidence that such a significant amount is being spent on research and development that the shares ought to be a bargain, if and when the company recovers.

Examples include Kewill Systems, which had a very attractive PRR of 2 in January 1993, when the shares were 47p (end of 1993 -265p); Avesco had a PRR of 3 in January 1993, when the shares were only 15p (end of 1993 - 130p after a 1 for 3 rights issue at 63p); Kalamazoo had a PRR of 4 in early 1993, when the shares were 30p (end of 1993 - 100p).

Kenneth Fisher, in Superstocks, again writes at length about PRR's and believes them to be a very powerful measure for technology stocks, especially when used in conjunction with low PSRs.

NET ASSET VALUE PER SHARE
The net asset value per share is based on information disclosed in the last published annual report. The figure is calculated without deducting intangibles so it is comparable to the PBV not the PTBV.

NET CASH PER SHARE
Net cash per share is also based on information disclosed in the last published annual report.
It is only shown when the figure is positive so cash plus near-cash assets must exceed borrowings due within one year.

It is important to bear in mind that a strong net cash per share position does not necessarily mean that a company is in great shape financially. For example, relatively short term borrowings, when they became due in say 15 months, might be sufficient to extinguish the cash position when they are repaid.

ADVICE TO READERS While this website is checked for accuracy, we are not liable for any incorrect information included. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. other sites in the group Investing For Growth your guide to successful investment and future earnings... The Company Guide The No1 Information source on UK stockmarket Companies Corporate Register The No1 Information source on decision makers in the UK stockmarket Companies Company REFS Company REFS is a UK investor site for Equity Market Investor pages The comparison website dedicated to the private investor Aim Quoted home of the active AIM investor UnQuoted The home of the Off-Exchange Investment Community Room to Invest Investor Pages – the one stop comparison website for private investors   © Copyright © St. Paul's Equities Limited Ltd 2008 Site map Disclaimer