In­vest DIY: Look­ing be­yond the usual ra­tios

Finweek English Edition - - News - By Si­mon Brown

fRe­port­ing ra­tios are im­por­tant in­di­ca­tors that show growth within a com­pany and help to com­pare it with peers. But if you’re se­ri­ous about in­vest­ing, you should be dig­ging even deeper by crunch­ing some num­bers your­self.

inan­cial re­sults are rows and rows of num­bers that of­ten tell us lit­tle on the sur­face, be­yond in­creases or de­creases in rev­enue, in­ven­to­ries and the like. Hence the in­vest­ment in­dus­try cre­ates ra­tios to help un­der­stand the data bet­ter. These ra­tios also en­able com­par­i­son be­tween pre­vi­ous pe­ri­ods, as well as against peers within the sec­tor.

Typ­i­cally, we look at the pop­u­lar price-toearn­ings ra­tio (P/E), div­i­dend yield (DY) and head­line earn­ings per share (HEPS) be­fore delv­ing in deeper to oth­ers such as re­turn on eq­uity (RoE), debt-to-eq­uity (DE) and the like.

These cer­tainly serve their pur­poses, but there are a lot of other ra­tios that we could be con­sid­er­ing that can help us un­der­stand a busi­ness and its fu­ture prospects. It is also true that of­ten times these more be­spoke ra­tios may be sec­tor spe­cific.

For ex­am­ple, in re­tail, what about sales per square me­tre of re­tail space, or per store? This would show the ef­fec­tive­ness of the space be­ing used. Dis­count re­tail­ers may see a high rate of sales per me­tre, while high-end fash­ion re­tail­ers may have a lower num­ber. This ra­tio would help us see sales trends by re­tail space, but could also give us a glimpse into can­ni­bal­i­sa­tion that may be hap­pen­ing as a busi­ness opens new stores that will not only be at­tract­ing new cus­tomers but also cus­tomers from ex­ist­ing stores.

One ra­tio I very much like is rev­enue per staff mem­ber. This works not only in re­tail, but also in other sec­tors such as bank­ing and gives a clear pic­ture of the pro­duc­tiv­ity of the busi­ness’ staff. Two busi­nesses in the same sec­tor may have vastly dif­fer­ent sales per staff mem­ber. All else be­ing equal, it would sug­gest that the one busi­ness is over­staffed and hence pay­ing too large a salary bill.

An­other in­di­ca­tion of ef­fi­ciency would be stock turnover. How many times a year does a busi­ness turn over its in­ven­to­ries? Now, if you add sales per square me­tre, sales per staff mem­ber and stock turnover, you will start get­ting a great pic­ture of the over­all ef­fi­ciency of a busi­ness be­yond just profit growth. It’s hugely help­ful – not only to see the trends within the busi­ness you are look­ing at, but also to com­pare against its peers (and even in­ter­na­tional com­par­isons can be help­ful).

An exercise such as this one was ex­actly what got me out of Pick n Pay and into Sho­prite* in the early 2000s. For decades Pick n Pay had been the blue-chip mass food re­tailer in South Africa and I held it. But then, when other ra­tios such as HEPS growth and op­er­at­ing mar­gins started to sug­gest Sho­prite was the bet­ter op­tion, dig­ging into these more niche ra­tios con­firmed that Sho­prite was in­deed streets ahead of Pick n Pay in terms of over­all busi­ness ef­fi­cien­cies.

Now the hard part with all of this is that for the most part these num­bers are not pub­lished by ei­ther the com­pany or our usual source of fun­da­men­tal data. So, you will have to crunch the data your­self and it is not al­ways easy to get all the num­bers.

An­nual re­ports are once again a use­ful source for much of what you would need, but some data, such as square me­tres of re­tail space, may sim­ply not be avail­able. So you’d have to hack it to use sales per store – a still very use­ful ra­tio.

In­vest­ing is about dig­ging and about data. You need to keep an eye on the dif­fer­ent data points that will help you un­der­stand a po­ten­tial in­vest­ment bet­ter. ■ ed­i­to­[email protected]­

*The writer owns shares in Sho­prite.

In­vest­ing is about dig­ging and about data. You need to keep an eye on the dif­fer­ent data points that will help you un­der­stand a po­ten­tial in­vest­ment bet­ter.

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