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ShareScope

How investors How investors evaluate company evaluate company

performanceperformanceTim ClarkeTim Clarke

General Manager, ShareScopeGeneral Manager, ShareScope

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Stock markets

Initial Public Offering

Ltd v Plc• Share ownership• Control• Accounts / reporting• Money-raising• Cost

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Investing

• Superior returns• Fund management• Growth, Value, Income, Momentum

• Your share of profits• Yield / interest rate• Dividend reinvestment• Compounding

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Dividends

• Einstein described compound returns as the “eighth wonder of the world”.

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Dividends

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Compounding

Bob’s Grocery Stores Plc

Share price 100p Holding period 30 years

Dividend 4p Share price remains unchanged

Value of shares £1000 1000 x 100p

Income received £1200 4p x 1000 x 30yrs

Investment value £2200 £1000 + £1200

Annual income £40 1000 x 4p

Yield on cost 4% 4p / 100p

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Compounding

Initial value of shares £1000 1000 x 100p

Income received £0 Dividends reinvested

Final value of shares £3243 3243 x 100p

Annual income in year 30 £130 3243 x 4p

Yield on cost 13% 13p / 100p

Bob’s Grocery Stores Plc

Share price 100p Holding period 30 years

Dividend 4p Share price remains unchanged

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Compounding

Initial value of shares £3325 1000 x 332.5p

Income received £0 Dividends reinvested

Final value of shares £69,335

Annual income in year 30 £2754

Yield on cost 83% £2754/ £3325

British American Tobacco Plc (BATS)

2nd Jan 2000 Share price = 332.5p Dividend = 22.2p

2nd Jan 2015 Share price = 3522p Dividend = 144.9p

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Dividend Yield

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PrivateInvestors

Merchant Banks / Fund

ManagersStockbrokers

SELL SIDE BUY SIDE

Stock Market

Structure of the market

Market capitalisation

Share price x No. Shares

e.g. Tesco Plc

Share price = 219.25pNo. Shares = 8,123,000,000Market cap. = £17,809,677,500

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Profits/earnings

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Profits/earnings

EPS = Earnings per Share

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Profitability

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Profitability

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Profitability

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• Minefield• Continuous operations• GAAP• Exceptional items

Practical considerations

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Profitability

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P/E =

Market cap / Value

PriceEPS

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Price/Earnings Ratio

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Price/Earnings Ratio

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Price/Earnings Ratio

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PEG = PE / Earnings Growth

PEG

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Cash Flow & Liquidity

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Dividend cover

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Dividend cover

OM = Operating Profit / Turnover (Sales)

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Operating Margin

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Balance Sheet

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Debt

Gearing = Debt / Shareholder funds

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Returns

Return on capital employed (ROCE)

Profit / Shareholder equity & Total borrowing

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Returns

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Returns

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Problems with EPS

• Share buybacks• Debt instead of equity

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Discount/Premium to NAV

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Discount/Premium to NAV

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Discount/Premium to NTAV

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City Expectations

R R R

14/3/11 14/9/12'12Jul Jul

Sainsbury (J) PLC

Oct Apr

Pence Ord

360

350

340

330

320

310

300

290

280

270

260

ScopeShareChart (c) www.sharescope.co.uk

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City Expectations

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City Expectations

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City Expectations

-16%

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Was Tesco a good investment?

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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

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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