Stock Market Investment Terms
ADOPTED PERFORMANCE CRITERION (APC):
APC is mostly based on data from the past five years, but it may also be adjusted to reflect material information about a company’s future.
Adopted Performance Criterion (APC) is an estimate of what StockVal’s analysts consider the annual sustainable business performance of a particular company to be. Annual sustainable business performance is selected from either the Normalised Return on Equity (NROE) or the Internal Rate of Return over the review period. It is mostly based on data from the past five years, but it may also be adjusted to reflect material information about a company’s future. Alternatively, both of these may be overridden and StockVal’s analysts may select another factor that is found in the box labeled “Other”.
AMORTISATION OF GOODWILL:
This is a disused term as of 2005 due to changes in Australian and International accounting standards. For data prior to this period, it represents periodic write-downs of a company’s goodwill.
ABNORMALS:
Abnormals are usually of a non-recurring nature. For example, an unrealised gain from currency hedging would be written back as an abnormal because it is not congruent with the normal operations of the business.
However, one must differentiate between what the company claims to be abnormal, significant or unusual, and what really is an unusual one-off event.
As Warren Buffett suggests, abnormals are merely a substitute for the word ‘mistake’; that is, costly errors on the part of management. When you buy into a business, management comes with the other assets and liabilities, so management mistakes must not be overlooked.
BORROWINGS:
This includes any interest-bearing debt related to the company.
CAPITAL ALLOCATION:
This is decided by the management of a company. It refers to how much of the company's profits management retains, pays out as a dividend or what it does with the capital it raises.
DISTRIBUTED NROE (D):
This is the portion of the NROE that is paid out to ordinary shareholders as dividends or distributions.
DIVIDEND:
This is the amount a company pays to shareholders, usually from its most recent earnings.
DIVIDEND YIELD (DY):
This is a measure of income return (i.e. dividends or distributions) to a shareholder based on the current share price.
GROSSED UP DIVIDEND YIELD (GUDY):
This is the same as the dividend yield (DY), but adjusted to reflect the value of franking credits. Where a company does not pay franking credits, the GUDY will be the same as the DY.
EARNINGS PER SHARE (EPS):
The portion of a company's profit allocated to each outstanding share of common stock. In the EPS calculation, it is sensible to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time.
Diluted EPS expands on the basic EPS by including other securities such as rights and options that may convert to ordinary shares at a future date. Earnings per share is incorrectly considered by many to be the single most important variable in determining a share's price.
Assume that a company generates a net profit of $25 million. If the company paid out $1 million in dividends on preference shares and had 10 million shares for the first half of the year and 15 million shares for the second half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million. Then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).
An important aspect of EPS that is StockVal’s focus but often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company.
Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
EQUITY PER ORDINARY SHARE:
This is the amount of equity attributable to shareholders on a per share basis. That is, total shareholders equity divided by the number of shares.
EQUITY RATIO:
This is a measure of gearing in a company, but with a focus on equity. It is calculated by dividing total ordinary equity by (total ordinary equity + total liabilities).
INTANGIBLES:
This is the total of a company’s assets that are not tangible. For example: trademarks, licenses, goodwill, etc.
INTEREST BEARING DEBT:
This includes the liabilities of the company that demand payment of interest. Examples include: bank loans, corporate bonds, etc.
INTERNAL RATE OF RETURN (IRR):
This is the discount rate used in a Discounted Cash Flow (DCF) calculation that leads to a Net Present Value (NPV) of zero.
LIABILITIES:
This is money that a company owes to someone else.
MINORITIES:
These are entities that have a minority interest in a company through equity ownership. Typically these minority interests are removed from calculations as StockVal’s analysts are primarily interested in intrinsic value as it relates to ordinary shareholders.
NEW ORDINARY SHARE CAPITAL:
This is the amount of new equity raised during the period. Generally it is the result of an issue of shares to existing and/or new shareholders.
NORMALISED EARNINGS:
Unlike ordinary earnings, normalised earnings takes into account the retained earnings adjusted for any non ordinary items, dividends before tax, as well as changes in reserves and any amortisation of goodwill.
NORMALISED IRR:
The annual figures are the shareholder's cash flow. The IRR therefore reflects the investment return over the review period of buying and selling the company at its ordinary stock book value after treating abnormals as if they never occurred and writing back the artificial impact of amortising goodwill.
ORDINARY CAPITAL BUYBACKS:
This is the amount of equity repurchased by the company, either on-market or off-market.
PRICE EARNINGS (P/E) RATIO:
This is the market price of a company's shares divided by the company's earnings, paid to shareholders, per share. It is widely (and wrongly) regarded as a measure of value.
REINVESTMENT (RI):
This is the portion of the NROE that is not distributed to investors and is reinvested.
RETURN ON EQUITY (ROE):
Normalised Earnings / Average Equity. The single most important ratio in the assessment of a business - the measure of performance. A good rate of return on equity and little or no debt are pre-requisites long advertised by Warren Buffett in the businesses he wishes to purchase. Only businesses with high rates of return on equity can convert a dollar used to finance growth into at least a dollar of long-term market value.
SECTOR:
This is a logical grouping for a company based on the type of operations it undertakes.
V/P:
This is the calculated intrinsic value divided by the current market price.
VALUE:
This is a calculated value that represents the intrinsic value of a company’s shares.
