More Gems from SPG

Financial Statistics


Nett Tangible Asset Backing Per Share (NTA/Share)

This is a more conservative measure than Nett Asset Backing Per Share (NAB/Shr). NTA/Shr is more conservative because the intangible assets (mainly goodwill) are deducted from the total value of the assets before dividing the amount by the number of share.

For most companies, the NTA and NAB are similar. NAB/Shr is supposed to show the actual nett amount of asset which is represented by each share of the company. This is an often quoted figure but its use is very limited. The reason being that the NAB/Shr is dependent on the total book value of the assets of company which in turn is dependent on the valuation method used to record the value of each piece of the assets fo the company. Some companies are very conservative and use the original purchase prices as the book values. Other companies use market values. Furthermore some of those companies which use market values may be over generous in their method of determining market values. Thus the true value of the assets of a company is very difficult to identify and can be very different from the book NAB of the company. We would advise the use of this piece of data with care. Additional research is needed before a firm judgement can be given.

The NTA/Shr can be used to compute the Price To Book Ratio by dividing the current price by this figure. This ratio shows how many times is the price higher than the NTA/Shr. Ceteris paribus the stock with the lowest Price To Book ratio for the same industry represents the best value. For example, a company selling at 70% of its NTA would seem like good value, as we can buy at well below the cost of its assets, unless it had originally bought its assets at well inflated prices.

Liquid Asset Per Share (Liq Assets/Share)

Liquid Asset is defined to include cash, bank balances and deposits. Generally a company which has a lot of liquid assets on hand is a financially strong one. A company which is financially weak is unlikely to have a lot of liquid assets on hand. However, some financially sound company do not have a lot of liquid assets as they may have other uses for their liquid assets. A very high ratio of liquid asset per share indicates high financial strength of a company.

Debt/Equity Ratio (D/E Ratio)

The D/E Ratio measure the ratio between the amount of Interest Bearing Debt a company has and the amount of Shareholders Equity. The amount of shareholders equity of a company is the same as its Nett Asset Backing. One must bear in mind what we have said about the lack of standardisation in measuring the value of the assets of a company.

D/E ratio is another crude measure of the financial strength of the company. The smaller is the debt relative to the equity, the stronger is a company. As a very rough guide, a D/E ratio of more than 0.5 is regarded as high and one of more than 1.0 is regarded as very high. A very low ratio supports the contention that a company is a financially strong one.

Altman's Z-Score

This is a popular "all in one" measure of the financial strength of a company. The higher the value of the Z-score, the stronger is the company financially. Simplistically, a Z-Score of below 2.00 indicated that the financial strength of a company is questionable and a score of above 2.00 is regarded as good.

It is to be noted that the computations of Z-score includes the price of the share and if the market price is very low, the Z-Score can be very low also. Further, it is to be noted that the Z-score computed for a particular financial year for the situation as at the end of the financial year. The current situation may be very different from that at the year end.

Asset Turnover

This ratio indicates the efficiency with which the company is able to use all its assets to generate sales. Generally, the higher a company's total asset turnover, the more efficiently its assets have been used. Please note that different industries tend to have different asset turnover ratio. This ratio should only be used for comparing firms in the same industry. (Asset Turnover = Total Sales/ Total Assets)

Gross Margin

Gross Margin equals Gross Profit/Sales. Gross Profit is defined as Sales Revenue - Cost of Goods Sold. Gross margin measures (roughly) the percentage value added by a firm on its raw material before selling it. For the same industry, the higher is the gross margin of a firm, the higher is the potential for obtaining profit and the better is the management quality.

Free Cashflow to Capital

FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend. FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher the ratio, the more efficiently is the firm using its capital.

Return on Equity (ROE)

In the West this is considered to be a most important ratio for it is an indication of how well the management is making use of the assets of the company in generating return for its shareholders. Generally, it should not be less than 10% averaged over time. However, owing to the fact that a great number of local Malaysian companies have vastly overvalued their assets, their ROE is very low. We consider low ROE to be a red flag. It shows either the company is poor in managing its assets or high in revaluing its assets or both. Either of these is not a good sign.


Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.