Publications
Partners
We emphasise every year it’s critical for readers to take time to scrutinise the methodology used by our friends at McGregor-BFA in calculating rations and performance measures.
Getting to know how the rankings are calculated can be very helpful in pinpointing possible winners and – perhaps more importantly – not getting tripped up by the anomalies inevitably thrown up by such a massive research undertaking.
Thankfully, we can look back on our report last year and say with some pride most of the handful of companies cited as regular “performers” across numerous criteria over the years continued to live up to our expectations despite a rather tumultuous year for business.
Here we can mention three real “sleepers”: OneLogix, Pinnacle Technology Holdings (not Pinnacle Point) and African Media Entertainment (AME), which – at the time of writing – had just declared a rather attractive special dividend.
Naturally, we aren’t that one-eyed not to mention we had also picked up African Dawn – now a much-maligned small cap disaster – as a regular performer over the years.
Such things happen, and no amount of number-crunching by the hard-working folk at McGregor-BFA can raise the flag on potential breaches in corporate governance.
What follows – for the convenience of readers – is a brief run through the main ratios and performance measurements.
The McGregor-BFA financial ratio index (FRI) is one of our newer tables, published for the first time in 2008.
The FRI shows a weighted average composite financial ratio index calculated by using five major financial ratios (already in use in the Top 200).
Ultimately, the FRI should show company performance by looking at both financial performance and financial position.
The index is compiled over five years, allowing readers to compare a company’s performance over the years as well as a company’s performance against its peers over the medium term.
The method used to compile the index is to aggregate the numerators and then the denominators.
In compiling the index, McGregor-BFA uses the most recent five years of data for each company, with 2004 being the base year for most companies.
Of course, in instances where 229 annual reports were not yet available, then 2003 would have been used as the base year, with 2008 being the latest financial year.
The FRI table ranks companies based on the index for the latest year.
That makes it possible to annualise individual companies based on the changes in the index over five years – remembering that the first year is equal to 100.
A more detailed explanation of how the FRI is calculated is available in our report that accompanies the table.
The centrepiece of our Top 200 survey remains – at least in the eyes of most of our hacks – the internal rate of return (IRR).
Internal rate of return
IRR is widely regarded as the most efficient way of gauging “real” growth in a company.
The measure incorporates what we like to call “pocketed returns” (dividends and other distributions) as well as “paper” returns (share price growth).
The actual rate is measured by means of a discounted cash flow calculation.
The share price from five years ago (end-December 2004) is taken as a cash outflow and all the annual dividends for the five-year period (both cash and scrip dividends), as well as the share price at year-end December 2009, are taken as cash inflows.
The IRR is then calculated by finding the discount rate that equates the current value of all the dividends and the share price at end-December 2009 with the share price five years ago.
Obviously, the calculation takes into consideration structural changes, such as share splits or share consolidations.
For old school investors we also still provide ample tables on the many (many) variations of earnings. Bottom line or net profit, in all our tables, is defined as taxed profit attributable to shareholders.
Deferred taxation and amounts dropped through to reserves are deemed retained profits.
However, we strip out items such as the cost of control written off and exploration expenditure from the net profit definition.
Extraordinary items (ie, one-off profits or losses) are also taken out of pre-tax profits, operating profit and earnings before interest, tax, depreciation and amortisation.
That simply means readers can peruse the underlying fundamentals of a business without one-off distractions.
However, the Top 200 survey does make provision for extraordinary items, dedicating a separate section to those sometimes fascinating incidents.
Once again we think readers might well be surprised at just how many companies earn a goodly portion of their bottom line from one-off events.
Earnings per share
While company analysis has changed over the past decade (if anything to focus on operational cash flows), earnings per share remains the default measure to gauge company performance and test relative value.
These days, investors have to take cognisance of a handful of earnings variations: headline earnings, basic earnings, diluted earnings and core earnings.
Where historical earnings (EPS) are used, those calculations do take into account share splits and share consolidations.
Solvency ratios
Investors are now paying for more attention to solvency ratios – especially keeping a close watch on company gearing in these tough times.
The broader gearing calculations – interest-bearing debt to total assets and interest-baring debt to equity – should be able to show readers which companies could be squeezed.
These ratios are more fully explained in the relevant report.
Reference to total assets in this survey refers to a combination of fixed assets and current assets.
But sometimes stock is excluded from current assets. Investments are taken at market value (if they’re listed) or at directors’ valuation (if unlisted).
Other assets (such as fixed property) are regarded at book value.
The survey ignores the revaluation of assets and investments when such a development isn’t taken through the company’s balance sheet.
In terms of current assets, cash balances are added back when those are offset against bank overdrafts.
Similarly, tax paid in advance is offset against tax payable in order to work with a net amount.
The cost of control and intangible assets (goodwill, patents, licences, etc) are excluded, but tangible mining assets are included.
Importantly for those gauging building and infrastructure-aligned stocks, if amounts billed on contracts exceed the value of the contract in progress then the difference is included with retained income.
If the amount received consists of deposits then the difference is included with creditors.
Inventories are then adjusted to reflect average value.
Equity funds (or shareholders’ funds) are deemed to comprise ordinary share capital, capital reserves and distributable reserves – adjusted for the same items as total assets.
Provisions included with credit balances – such as warranty provision, self-assurance provisions and maintenance provisions – are included under long-term loans or creditors (when items are regarded as short-term provisions).
Deferred tax forms part of retained profits.
Because cost of control and intangible assets aren’t included with total assets both items are deducted from equity funds.
Readers that scout the JSE for attractive yields should know rankings for the Top 200 dividends incorporate the total cash payouts and scrip dividends (dividends in specie) during a financial year.
Return on assets (RoA) and return of equity (RoE) will no doubt also be popular tables to peruse.
RoA is measured by dividing profit before interest and tax by total assets. RoE shows net profit as a percentage of equity.
Interest cover involves profit (before interest, lease charges and extraordinary items) divided by the total of interest and financial lease charges paid.
Recalling our earlier remark that company “gearing” will be anxiously watched by readers, it goes without saying interest cover may also be a table that attracts more than a casual glance this time around.
Inventory turn measures how many times stock (ie, goods for sale) is turned over in a year.T
The quick ratio divides current assets (ie, items that can be liquidated quickly) by current liabilities (debts that might be called in) and ultimately reflects just how easily a company can cover its debts.
The market capitalisation table is based on the market value of all fully paid and issued ordinary shares of a company. The calculation was effected on the last trading day of 2009.
Please – please – remember
We must point out the figures stated in the various tables in the Top 200 survey may differ from the figures shown in the companies’ annual reports. That’s simply because McGregor-BFA makes adjustments to certain of the figures contained in annual reports to allow for a meaningful comparison.
- Finweek
Getting to know how the rankings are calculated can be very helpful in pinpointing possible winners and – perhaps more importantly – not getting tripped up by the anomalies inevitably thrown up by such a massive research undertaking.
Thankfully, we can look back on our report last year and say with some pride most of the handful of companies cited as regular “performers” across numerous criteria over the years continued to live up to our expectations despite a rather tumultuous year for business.
Here we can mention three real “sleepers”: OneLogix, Pinnacle Technology Holdings (not Pinnacle Point) and African Media Entertainment (AME), which – at the time of writing – had just declared a rather attractive special dividend.
Naturally, we aren’t that one-eyed not to mention we had also picked up African Dawn – now a much-maligned small cap disaster – as a regular performer over the years.
Such things happen, and no amount of number-crunching by the hard-working folk at McGregor-BFA can raise the flag on potential breaches in corporate governance.
What follows – for the convenience of readers – is a brief run through the main ratios and performance measurements.
The McGregor-BFA financial ratio index (FRI) is one of our newer tables, published for the first time in 2008.
The FRI shows a weighted average composite financial ratio index calculated by using five major financial ratios (already in use in the Top 200).
Ultimately, the FRI should show company performance by looking at both financial performance and financial position.
The index is compiled over five years, allowing readers to compare a company’s performance over the years as well as a company’s performance against its peers over the medium term.
The method used to compile the index is to aggregate the numerators and then the denominators.
In compiling the index, McGregor-BFA uses the most recent five years of data for each company, with 2004 being the base year for most companies.
Of course, in instances where 229 annual reports were not yet available, then 2003 would have been used as the base year, with 2008 being the latest financial year.
The FRI table ranks companies based on the index for the latest year.
That makes it possible to annualise individual companies based on the changes in the index over five years – remembering that the first year is equal to 100.
A more detailed explanation of how the FRI is calculated is available in our report that accompanies the table.
The centrepiece of our Top 200 survey remains – at least in the eyes of most of our hacks – the internal rate of return (IRR).
Internal rate of return
IRR is widely regarded as the most efficient way of gauging “real” growth in a company.
The measure incorporates what we like to call “pocketed returns” (dividends and other distributions) as well as “paper” returns (share price growth).
The actual rate is measured by means of a discounted cash flow calculation.
The share price from five years ago (end-December 2004) is taken as a cash outflow and all the annual dividends for the five-year period (both cash and scrip dividends), as well as the share price at year-end December 2009, are taken as cash inflows.
The IRR is then calculated by finding the discount rate that equates the current value of all the dividends and the share price at end-December 2009 with the share price five years ago.
Obviously, the calculation takes into consideration structural changes, such as share splits or share consolidations.
For old school investors we also still provide ample tables on the many (many) variations of earnings. Bottom line or net profit, in all our tables, is defined as taxed profit attributable to shareholders.
Deferred taxation and amounts dropped through to reserves are deemed retained profits.
However, we strip out items such as the cost of control written off and exploration expenditure from the net profit definition.
Extraordinary items (ie, one-off profits or losses) are also taken out of pre-tax profits, operating profit and earnings before interest, tax, depreciation and amortisation.
That simply means readers can peruse the underlying fundamentals of a business without one-off distractions.
However, the Top 200 survey does make provision for extraordinary items, dedicating a separate section to those sometimes fascinating incidents.
Once again we think readers might well be surprised at just how many companies earn a goodly portion of their bottom line from one-off events.
Earnings per share
While company analysis has changed over the past decade (if anything to focus on operational cash flows), earnings per share remains the default measure to gauge company performance and test relative value.
These days, investors have to take cognisance of a handful of earnings variations: headline earnings, basic earnings, diluted earnings and core earnings.
Where historical earnings (EPS) are used, those calculations do take into account share splits and share consolidations.
Solvency ratios
Investors are now paying for more attention to solvency ratios – especially keeping a close watch on company gearing in these tough times.
The broader gearing calculations – interest-bearing debt to total assets and interest-baring debt to equity – should be able to show readers which companies could be squeezed.
These ratios are more fully explained in the relevant report.
Reference to total assets in this survey refers to a combination of fixed assets and current assets.
But sometimes stock is excluded from current assets. Investments are taken at market value (if they’re listed) or at directors’ valuation (if unlisted).
Other assets (such as fixed property) are regarded at book value.
The survey ignores the revaluation of assets and investments when such a development isn’t taken through the company’s balance sheet.
In terms of current assets, cash balances are added back when those are offset against bank overdrafts.
Similarly, tax paid in advance is offset against tax payable in order to work with a net amount.
The cost of control and intangible assets (goodwill, patents, licences, etc) are excluded, but tangible mining assets are included.
Importantly for those gauging building and infrastructure-aligned stocks, if amounts billed on contracts exceed the value of the contract in progress then the difference is included with retained income.
If the amount received consists of deposits then the difference is included with creditors.
Inventories are then adjusted to reflect average value.
Equity funds (or shareholders’ funds) are deemed to comprise ordinary share capital, capital reserves and distributable reserves – adjusted for the same items as total assets.
Provisions included with credit balances – such as warranty provision, self-assurance provisions and maintenance provisions – are included under long-term loans or creditors (when items are regarded as short-term provisions).
Deferred tax forms part of retained profits.
Because cost of control and intangible assets aren’t included with total assets both items are deducted from equity funds.
Readers that scout the JSE for attractive yields should know rankings for the Top 200 dividends incorporate the total cash payouts and scrip dividends (dividends in specie) during a financial year.
Return on assets (RoA) and return of equity (RoE) will no doubt also be popular tables to peruse.
RoA is measured by dividing profit before interest and tax by total assets. RoE shows net profit as a percentage of equity.
Interest cover involves profit (before interest, lease charges and extraordinary items) divided by the total of interest and financial lease charges paid.
Recalling our earlier remark that company “gearing” will be anxiously watched by readers, it goes without saying interest cover may also be a table that attracts more than a casual glance this time around.
Inventory turn measures how many times stock (ie, goods for sale) is turned over in a year.T
The quick ratio divides current assets (ie, items that can be liquidated quickly) by current liabilities (debts that might be called in) and ultimately reflects just how easily a company can cover its debts.
The market capitalisation table is based on the market value of all fully paid and issued ordinary shares of a company. The calculation was effected on the last trading day of 2009.
Please – please – remember
We must point out the figures stated in the various tables in the Top 200 survey may differ from the figures shown in the companies’ annual reports. That’s simply because McGregor-BFA makes adjustments to certain of the figures contained in annual reports to allow for a meaningful comparison.
- Finweek
