Financial Tenet: The One-Dollar Premise

Financial Tenet:  For every dollar retained, make sure the company has created at least one dollar of market value.

An Illustration:

Public Bank Berhad

(Sen) (Sen) (Sen) (RM) (RM) Year DPS EPS Retained Price Price Earnings Low High 2002 9.5 25.5 16.0 3.02 4.20 2003 9.9 30.0 20.1 3.26 5.42 2004 42.8 36.2 -6.6 5.02 7.04 2005 48.3 40.7 -7.6 5.94 7.47 2006 37.9 47.8 9.9 5.84 7.57 2007 45.5 60.7 15.2 7.28 10.73 2008 56.7 69.5 12.8 7.52 11.50 2009 40.1 71.9 31.8 6.90 11.14 2010 37.2 87.0 49.8 10.94 13.02 2011 46.8 99.5 52.7 11.68 13.60 374.7 568.8 194.1 7.48

Since 2002, the market value of PBB has grown from RM 4.20 to RM 11.68 - an increase of RM 7.48 or 748 sen.  (Calculation:  Low Price of 2001 RM 11.68 - High Price of 2002 RM 4.20).

During these 10 years, PBB earned 568.8 sen.  It paid shareholders, in dividends, 374.7 sen and retained 194.1 sen for reinvestment.

Thus, PBB retained 194.1 sen in earnings and created 748 sen in market value for its shareholders.  That is, for every RM 1 retained earnings over the last 10 years, PBB created RM 3.85 in market value for its shareholders.

This financial accomplishment demonstrates the superior management  and the ability to reinvest shareholder's money at optimal rates.



Financial Tenet:  For every dollar retained, make sure the company has created at least one dollar of market value.

This is a quick financial test that will tell you not only about the strengths of the business but how well management has rationally allocated the company's resources.  From a company;s net income subtract all dividends paid to shareholders.  What is left is the company;s retained earnings.

1.  If the business has employed retained earnings unproductively over the 10 year period, the market will eventually catch up and will set a low price on the business.  If the change in market value is less than the sum of retained earnings, the company is going backward.

2.  But if your business has been able to earn above-average returns on retained capital, the gain in market value of the business should exceed the sum of the company's retained earnings, thus creating more than one dollar of market value for every dollar retained.