Top Stocks 2016. Roth Martin
href="http://www.alanhull.com/">www.alanhull.com), author of Invest My Way, Trade My Way and Active Investing.
Under the share-price chart is a small table with the following data.
This is the closing price on 1 September 2015. Also included are the 12-month high and low prices, as of the same date.
This is the size of the company, as determined by the stock market. It is the share price (again, as of 1 September 2015) multiplied by the number of shares in issue. All companies in this book must be in the All Ordinaries Index, which comprises Australia's 500 largest stocks, as measured by market capitalisation.
The NTA-per-share figure expresses the worth of a company's net tangible assets – that is, its assets minus its liabilities and intangible assets – for each share of the company. The price-to-NTA-per-share ratio relates this figure to the share price.
A ratio of one means that the company is valued exactly according to the value of its assets. A ratio below one suggests that the shares are a bargain, though usually there is a good reason for this. Profits are more important than assets.
Some companies in this book have a negative NTA-per-share figure – as a result of having intangible assets valued at more than their remaining net assets – and a price-to-NTA-per-share ratio cannot be calculated.
See Table M, in the second part of this book, for a little more detail on this ratio.
This is the total return you could have received from the stock in the five years to 1 September 2015. It includes reinvested dividends, bonus stock, rights issues and capital gain from the stock's appreciation. It is expressed as a compounded annual rate of return.
A dividend reinvestment plan (DRP) allows shareholders to receive additional shares in their company in place of the dividend. Usually – though not always – these shares are provided at a small discount to the prevailing price, which can make them quite attractive. And of course no broking fees apply.
Around a third of all large companies seem to offer such plans. However, they come and go. When a company needs finance it may introduce a DRP. When its financing requirements become less pressing it may withdraw it. Some companies that have a DRP in place may decide to deactivate it for a short time.
The information in this book is based on up-to-date information from the companies. But if you are investing in a particular company in expectations of a DRP, be sure to check that it is still on offer. The company's own website will often provide this information.
The price/earnings ratio (PER) is one of the most popular measures of whether a share is cheap or expensive. It is calculated by dividing the share price – in this case the closing price for 1 September 2015 – by the earnings per share figure. Obviously the share price is continually changing, so the PER figures in this book are for guidance only. Many newspapers publish the latest PER for every stock each morning.
This is the latest full-year dividend expressed as a percentage of the share price. Like the price/earnings ratio, it changes as the share price moves. It is a useful figure, especially for investors who are buying shares for income, as it allows you to compare this income with alternative investments, such as a bank term deposit or a rental property.
It is sometimes useful to compare a company's price/earnings ratio and its dividend yield with those of its sector.
Figures used in this book are those of the S&P/ASX sectors from September 2015.
Each commentary begins with a brief introduction to the company and its activities. Then follow the highlights of its latest business results. For the majority of the companies these are their June 2015 results, which were issued during July and August 2015. Finally, there is a section on the outlook for the company.
Here is what you can find in the main table.
These are the company's revenues from its business activities, generally the sale of products or services. However, it does not usually include additional income from such sources as investments, bank interest or the sale of assets. If the information is available, the revenues figure has been broken down into the major product areas.
Earnings before interest and taxation (EBIT) is the firm's profit from its operations before the payment of interest and tax. This figure is often used by analysts examining a company. The reason is that some companies have borrowed extensively to finance their activities, while others have opted for alternative means. By expressing profits before interest payments it is possible to compare more precisely the performance of these companies. The net interest figure – interest payments minus interest receipts – has been used for this calculation.
This is the company's EBIT expressed as a percentage of its revenues. It is a gauge of a company's efficiency. A high EBIT margin suggests that a company is achieving success in keeping its costs low.
The gross margin is the company's gross profit as a percentage of its sales. The gross profit is the amount left over after deducting from a company's sales figure its cost of sales: that is, its manufacturing costs or, for a retailer, the cost of purchasing the goods it sells. The cost of goods sold figure does not usually include marketing or administration costs.
As there are different ways of calculating the cost of goods sold figure, this ratio is best used for year-to-year comparisons of a single company's efficiency, rather than in comparing one company with another.
Many companies do not present a cost of goods sold figure, so a gross margin ratio is not given for every stock in this book.
The revenues for some companies include a mix of sales and services. Where a breakdown is possible, the gross profit figure will relate to sales only.
The profit before tax figure is simply the EBIT figure minus net interest payments. The profit after tax figure is, of course, the company's profit after the payment of tax, and also after the deduction of minority interests. Minority interests are that part of a company's profit that is claimed by outside interests, usually the other shareholders in a subsidiary that is not fully owned by the company. Many companies do not have any minority interests, and for those that do it is generally a tiny figure.
As much as possible, I have adjusted the profit figures to exclude non-recurring profits and losses, which are often referred to as significant items. It is for this reason that the profit figures in Top Stocks sometimes differ from those in the financial media or on financial websites, where profit figures normally include significant items.
Significant items are those that have an abnormal impact on profits, even though they happen in the normal course of the company's operations. Examples are the profit from the sale of a business, or losses from a business restructuring, the write-down of property, an inventory write-down, a bad-debt loss or a write-off for research and development expenditure.
Significant items are controversial. It is often a matter of subjective judgement as to what is included and what excluded. After analysing the accounts of hundreds of companies, while writing the various editions of this book, it is clear that different companies use varying interpretations of what is significant.
Further, when they do report a significant item there is no consistency as to whether they use pre-tax figures or after-tax figures. Some report both, making it easy to adjust the profit figures in the tables in this book. But difficulties arise when only one figure – generally pre-tax – is given for significant items.
In normal circumstances most companies do not report significant items. But investors should be aware of this issue. It sometimes causes consternation for readers of Top Stocks to find that a particular profit figure in this book is substantially different from that given by some