At Dabbl, we want to make buying shares as accessible as we possibly can – for everyone. To help with this, we’re running a series of blog posts covering a wide range of topics which impact the world of business, finance and investing. These snapshots have been carefully crafted to cut through the jargon and highlight some of the most important facts to consider in each subject.
Alphabet soup – a quick look at company reporting.
When a company comes to report its performance to shareholders, it’s always nice to get a feel for how things are going. But the most important point is that investors should have an ability to compare like-with- like. It allows questions like whether the Chief Executive’s new strategy has made a difference, are competitive pressures hitting the company, or is a big enough dividend being paid.
To help cater for this, accountants and investment professionals have between them been responsible for coming up with an absolutely mind-boggling range of metrics. We’re going to guide you through a few of these terms below, and we’re just going for the headline view here.
Turnover – the amount of money a company takes from customers in a given period.
Profit – the amount of money that’s left from the turnover after the expenses like cost of materials, salaries, property rental have been paid. Typically, headline profits are quoted before tax.
EBITDA – earnings before interest, taxation, depreciation and amortisation. That’s a mouthful, but it’s again another way of looking at how profitable a company is on a raw basis. Once you start adding in tax breaks or writing down assets, it clouds the picture.
Writing down – accounting rules mean that some assets have to be written down over a period of several years because their value falls. Computers are a classic example of this. You buy a laptop for £1000 with an expectation it will last two years. You write down the value of that asset by £500 a year.
P/E ratio – another common reporting metric. Take the value (or market capitalisation) of the company and divide it by the earnings reported. At a glance, an investor can see how their company is performing in terms of earnings on a standardised basis.
Dividend Cover – shareholders are compensated ideally with both a capital return (the share price increases) and through the payment of dividends. The prospect of dividend income can make companies more desirable investments, so dividend cover – earnings per share divided by dividend – gives an indication of how sustainable the payment is. Dividend cover greater than 2, so a 10 p dividend from a 25p EPS – is typically seen as healthy. If the number is less than 1, the company is paying out more than it is earning to shareholders.
Assets – these are items a company owns which have value. Typically they fall into two categories – tangible assets like computers or vehicles, and intangible assets including patents, computer software and even the goodwill of customers. Assets can be used as security against loans that the company needs to operate.
GAAP – underwriting all the terms above, and a myriad of others, is Generally Accepted Accounting Practice. This is the standard framework for reporting accounts, so any suggestion that numbers do not conform to GAAP might indicate you need to proceed with caution when trying to make those like-for- like comparisons.