COMPARATIVE Q3 2017 ANALYSIS BETWEEN GTBANK AND ZENITH BANK

ROE (Return on Equity): this is used to measure management performance, it indicates how well a company uses the capital from shareholders to generate profit. The higher the ratio, the better and suggest higher level of management performance.

ROA (Return on assets): it indicates the percentage of profit that a company earns in relation to its overall total assets.it measures the amount of profit made by a company per Naira of its assets, the higher the ratio, the better

 DAR (Debt to Asset Ratio): it shows the relationship between company’s liabilities and its assets. It indicates the proportion of assets that is financed by debt, the lower the ratio, the better.

EV/EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation and Amortisation): it estimates the number of years in which the company will repay its acquisition cost to the buyer through its earnings.

DE (Debt to Equity ratio): it provides an indication of a company’s finance structure and whether the company is more reliant on borrowing (debt) or shareholders capital to fund business operation, the higher the ratio, the riskier the company.

BVS (Book value per share): it is the difference between company’s asset and its liability.  it is a determinant of the value of a company equity relative to the market value.

PE (Price to Earnings): it indicates how much an investor pays for every one Naira the company earns. It can also be said to be the numbers of years it will take to recoup ones investment in the company.

EPS (Earnings per share): It indicates how much each share you own has earned.

FAIR VALUE: this is the value of the company relative to the return on FGN Savings Bond.

MARKET CAPITALIZATION: this is the market value of a company’s stock. It is derived by multiplying the number of share outstanding by the current share price. It helps investors to determine the cost of buying the entire shares of a company.it is the theoretical cost of buying a company.

ENTERPRISE VALUE: this is the actual cost of buying a company as it calculates the accurate value of a company take over price by factoring the debt in the company’s books.

TAKING ADVANTAGE OF THE NUMBERS: LADDERING FGN SAVINGS BOND

Investing in the FGN savings bond (FSB) might prove challenging to some speculators trying to put their tuppence to work because of the inconsistency in the rate that is being offered monthly. To invest equal amount of Naira in an investment such as FSB at equal time intervals is a prudent investment strategy that results to Naira cost averaging and help to increase the benefit of investing in bond by reducing reinvestment risk.

By laddering you construct your bond buying by staggering the quarterly payment dates. for example if you buy six bonds at equal intervals, you will be paid twenty four times a year, that is twice a month, but if you buy twelve bonds at equal interval, say every month for twelve months, you will be paid forty eight times in a year i.e. four times in a month or every week.   Receiving your money back to reinvest during different monthly interest rate will help reduce reinvestment risk. The table below shows the different interest rate on FGN savings bond in 2017. 

The FGN savings bond two years tenor was introduced in March 2017 and the three year tenor was added in April.

	2 YEAR INTEREST RATE (%)	3 YEARS INTEREST RATE (%)
MARCH	13.01	-
APRIL	12.794	13.794
MAY	13.189	14.189
JUNE	13.189	14.189
JULY	13.386	14.386
AUGUST	13.535	14.535
SEPTEMBER	13.817	14.817
OCTOBER	12.059	13.059
NOVEMBER	12.091	13.091
DECEMBER	11.738	12.738
AVERAGE	12.88	13.87

Those who plan to live off the income generated from their bond portfolio should ladder their bond because it lowers reinvestment risk (the potential possibility of getting principal back after the bond matures and having to reinvest it in a lower paying bond).

If you have been buying the 2 years and the 3 years FSB since when it was introduced up till the last auction on December 8^th 2017, you should expect to net an average of 12.88% on 2years and 13.87% on the 3 years tenor without the burden of taxation. The only down side is inflation which averaged 16%, but if you are a passive investor, it’s actually not a bad return on investment when compare to between 3% to 4% on savings deposit and 7.5% to 9.5% on fixed deposit exclusive of tax. 

BANKS Q3 2017 SHAREHOLDERS EQUITY AND TOTAL ASSETS

SHAREHOLDERS FUNDS

The shareholders equity shows the financial health of the company, it represents the value of the company if it were liquidated. It’s the net worth of the organization, the higher the better, a high net worth means that the organization has more assets than liability.

INSURANCE COMPANIES WITH NEGATIVE RETAINED EARNINGS IN Q3 2017

Retained earnings is the percentage of net earnings not paid out as dividends but retained in the business by the company for reinvestment or can be used to pay down debt, retained earnings is a safety net for the company. Negative accumulated retained earnings is a sign that the company has not consistently earned profit over a long period of time. This is a sign that management is not performing and could affect the company’s growth and expansion and shareholders should not expect dividend soon.

TAKING ADVANTAGE OF THE NUMBERS: RETURN ON ASSETS (ROA)

Return on assets (ROA) is a measurement of management performance; it tells investor/speculator how well a company uses its assets to generate income. A higher ROA indicates a higher level of management performance. Technically speaking, a company should always yield an ROA higher than the risk free rate of return, if the company’s ROA is less or equal to the risk free rate, a speculator is better off purchasing FGN savings Bond which has a guaranteed yield.

The greatest challenge for most individuals is the identification/ differentiation of an asset from a liability but as a number savvy investor/speculator this should be a no-brainer, What makes an asset or a liability is in the numbers, and your ability to read and take advantage of the numbers is a key fundamental to being successful at this game. 

Take a look at the return on assets of some NSE listed food products companies

	Cow 1	Cow 2	Cow 3	Cow 4	Cow 5	Cow 6
2012	-2.92	13.24	2.83	5.82	-0.65	25.88
2013	-5.30	15.54	1.74	5.13	6.21	23.62
2014	-7.77	12.24	0.02	5.25	7.15	14.87
2015	-30.38	11.86	2.02	1.64	-8.23	12.92
2016	8.44	8.10	2.71	-3.98	-11.34	10.00
AVERAGE	-7.59	12.20	1.86	2.77	1.37	17.46

As a financial speculator I like to view myself as a dairy farmer and the  asset class/companies I invest in as dairy cows, so as a dairy farmer, which cow would i rather own? That should be a no brainer, numbers don’t lie, the cow with consistent double digit return on assets. These cows feeds on the same pasture, drink the same water and lick the same salts but yet produce different quality and quantity of milk, cows are animal of habits and habit are in the DNA, these cows will keep on doing same thing over an extended period of time, just watch them for five years at least and you can tell how the next five years will be like.

 The main gist about ROA

Only buy companies that have high and consistent return on asset preferably in double digits

ROA is indicative of what has been done with the asset that is available to the company.

Note:

Cow 2 is Dangote sugar refinery, Cow 6 is NASCON allied industries.

COMPARATIVE Q3 2017 FINANCIAL ANALYSIS OF CADBURY AND NESTLE (NIG) PLC

KEY

ROE (Return on Equity): this is used to measure management performance, it indicates how well a company uses the capital from shareholders to generate profit. The higher the ratio, the better and suggest higher level of management performance.

ROA (Return on assets): it indicates the percentage of profit that a company earns in relation to its overall total assets.it measures the amount of profit made by a company per Naira of its assets, the higher the ratio, the better

ROTC (Return on Total Capital): it measures the profit earned using both debt and equity capital the higher the ratio, the better

RE/TA (Retain Earnings to Total Assets): it indicates the percentage of total assets that is funded by the retained earnings of the company. It is an indicator of the degree to which the company is retaining its profit and using it to finance assets instead of using debt to finance business operation, the higher the ratio, the better.

RE/SHE (Retain Earnings to Stockholders Equity):  it indicates if the company is retaining earnings in the business or if they are being distributed to the owners of the business. A low ratio suggests that the company is distributing more cash than it is retaining in the business and probably financing growth with debt.

DAR (Debt to Asset Ratio): it shows the relationship between company’s liabilities and its assets. It indicates the proportion of assets that is financed by debt, the lower the ratio, the better.

OCFDR (Operating Cash flow to Debt Ratio): it is an estimate of the amount of time it would take a company to repay its debt if all cash flow is devoted. The higher the ratio in percentage term the better.

EV/EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation and Amortisation): it estimates the number of years in which the company will repay its acquisition cost to the buyer through its earnings.

DE (Debt to Equity ratio): it provides an indication of a company’s finance structure and whether the company is more reliant on borrowing (debt) or shareholders capital to fund business operation, the higher the ratio, the riskier the company.

FAIR VALUE: this is the value of the company relative to the return on 2 years FGN Savings Bond.

BVS (Book value per share): it is the difference between company’s asset and its liability.  it is a determinant of the value of a company equity relative to the market value.

PE (Price to Earnings): it indicates how much an investor pays for every one Naira the company earns. It can also be said to be the numbers of years it will take to recoup ones investment in the company.

EPS (Earnings per share): It indicates how much each share you own has earned.

P/BV (Price to Book value):

OCF/S (Operating cash flow per share):

FOOD PRODUCTS -DIVERSIFIED MARKET CAP Vs ENTERPRISE VALUE

MARKET CAP: this is the market value of a company’s stock. It is derived by multiplying the number of share outstanding by the current share price. It helps investors to determine the cost of buying the entire shares of a company.it is the theoretical cost of buying a company.

ENTERPRISE VALUE: this is the actual cost of buying a company as it calculates the accurate value of a company take over price by factoring the debt in the company’s books.

Q3 2017 PHARMACEUTICAL MARKET CAP Vs ENTERPRISE VALUE

COMPARATIVE Q3 2017 PHARMACEUTICAL SECTOR FINANCIAL ANALYSIS

KEY

ROE (Return on Equity): this is used to measure management performance, it indicates how well a company uses the capital from shareholders to generate profit. The higher the ratio, the better and suggest higher level of management performance.

ROA (Return on assets): it indicates the percentage of profit that a company earns in relation to its overall total assets.it measures the amount of profit made by a company per Naira of its assets, the higher the ratio, the better

ROTC (Return on Total Capital): it measures the profit earned using both debt and equity capital the higher the ratio, the better

RE/TA (Retain Earnings to Total Assets): it indicates the percentage of total assets that is funded by the retained earnings of the company. It is an indicator of the degree to which the company is retaining its profit and using it to finance assets instead of using debt to finance business operation, the higher the ratio, the better.

DAR (Debt to Asset Ratio): it shows the relationship between company’s liabilities and its assets. It indicates the proportion of assets that is financed by debt, the lower the ratio, the better.

OCFDR (Operating Cash flow to Debt Ratio): it is an estimate of the amount of time it would take a company to repay its debt if all cash flow is devoted. The higher the ratio in percentage term the better.

EV/EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation and Amortisation): it estimates the number of years in which the company will repay its acquisition cost to the buyer through its earnings.

DE (Debt to Equity ratio): it provides an indication of a company’s finance structure and whether the company is more reliant on borrowing (debt) or shareholders capital to fund business operation, the higher the ratio, the riskier the company.

FAIR VALUE: this is the value of the company relative to the return on 2 years FGN Savings Bond.

BVS (Book value per share): it is the difference between company’s asset and its liability.  it is a determinant of the value of a company equity relative to the market value.

PE (Price to Earnings): it indicates how much an investor pays for every one Naira the company earns. It can also be said to be the numbers of years it will take to recoup ones investment in the company.

EPS (Earnings per share): It indicates how much each share you own has earned.

P/BV (Price to Book value):

OCF/S (Operating cash flow per share):

TAKING ADVANTAGE OF THE NUMBERS: RETURN ON EQUITY (ROE)

As a retail investor/speculator I really like to picture myself as a dairy farmer, and the companies I want to invest in or have invested in as a dairy cow capable of producing milk to nourish the life of the investor/farmer for an extra extended period. And this dairy cow is kept in the custody of some bunch of guys called management whose job is to take care of the cow on my behalf. And because I love numbers, and I know this game is all about numbers, I like to break down the ability of the custodians to make my dairy cow to produce milk well into the future into numbers and the number that allows me to gauge the performance of the cow and management is the return on equity numbers (ROE). Return on equity is a measurement of management performance; it tells the number savvy investor how well a company has used the capital from the shareholders to generate profit.

  It goes without saying that some managers and cows are natural born losers or mediocre, it’s in their DNA, no matter how well management nurture and feeds their cow they won’t produce a drop of milk, while some have a natural competitive advantage which makes them born winners, with little oversight they are capable of filling the silo with milk while some are in between, weather and environment determines their performance, this ones can best be classified as moody dairy cow. I don’t know of any dairy farmer who likes to keep a poorly producing cow on is farm, so why should you keep a poorly performing company in your portfolio.

So as an investor that likes to take advantage of the numbers, how do you identify and separate a born winner from a moody and mediocre company. The answer is in the consistency of the return on equity generated by each company over time or if you like, the consistency and quality of milk produced by the dairy cow over time.

Take a look at the return on equity of some NSE listed banks (dairy cow milk production in litre/yr)

	Dairy cow 1	Dairy cow 2	Dairy cow 3	Dairy cow 4	Dairy cow 5	Dairy cow 6
2007	27.43	15.52	9.59	24.68	12.86	10.14
2008	15.64	13.75	12.03	10.42	10.11	12.63
2009	14.43	5.59	9.99	3.73	-4.43	9.78
2010	17.82	9.51	11.11	8.43	5.86	109.44
2011	22.46	11.10	8.12	5.23	-15.96	-113.81
2012	30.58	21.75	11.86	17.40	20.31	-394.32
2013	27.09	18.72	21.40	4.84	21.28	3.86
2014	26.24	18.00	28.66	15.84	12.19	5.42
2015	24.04	17.78	14.64	2.58	2.64	5.05
2016	26.20	18.40	20.26	6.81	1.54	5.84
AVERAGE	23.19	15.01	14.77	9.99	6.64	-34.60

A true investor the type that likes to take advantage of the numbers will be highly interested in dairy cow 1, then dairy cow 2 and partially in dairy cow 3. Dairy cow 1return consistently above 20% ROE year on year with an average of 23.19, which could be indicative of a company that is benefiting or having a durable competitive advantage (strong DNA), this is a born winner, while dairy cow 2 returns above 15% ROE consistently with an average of 15.01 % and it is closely followed by dairy cow 3 with an average of 14.77%. Dairy cow 4 and 5 has an erratic ROE which is all over the place with occasional high years with an average of 9.99% and 6.64 respectively which is best classified as a moody dairy cow whose performance is subject to weather and the environment. Dairy cow 6 is a born loser. Dairy cow 6 is representative of a consistent poorly performing management (Defective DNA). When taking advantage of the numbers through the use of ROE, it is better to compare companies in the same industry or sector and to compare over long period of time, least being five years (compare specie with specie). A company that shows a consistently high ROE of over 15% on average for ten years has long lasting durable competitive advantage in that industry that can enable it to absorb and recover quickly from industry recession or an economic shock or more like saying a dairy cow with a strong DNA capable of withstanding disease outbreak (economic recession), drought (cheap finance), and poor diet (bad management).

The main gist about ROE

The cow must show a high and preferably double digit ROE

The ROE must be consistent year on year and not erratic

Lastly, don’t forget, this game is all about the numbers

Note

Dairy cow 1=GT Bank, dairy cow 2= zenith bank, dairy cow 5= Diamond bank, dairy cow 6= WEMA Bank