Top Stocks 2017. Roth Martin

begins with a brief introduction to the company and its activities. Then follow the highlights of its latest business results. For the majority of the companies these are their June 2016 results, which were issued during July and August 2016. Finally, there is a section on the outlook for the company.

Main table

      Here is what you can find in the main table.

      Revenues

      These are the company's revenues from its business activities, generally the sale of products or services. However, it does not usually include additional income from such sources as investments, bank interest or the sale of assets. If the information is available, the revenues figure has been broken down into the major product areas.

      Earnings before interest and taxation

      Earnings before interest and taxation (EBIT) is the firm's profit from its operations before the payment of interest and tax. This figure is often used by analysts examining a company. The reason is that some companies have borrowed extensively to finance their activities, while others have opted for alternative means. By expressing profits before interest payments it is possible to compare more precisely the performance of these companies. The net interest figure – interest payments minus interest receipts – has been used for this calculation.

      EBIT margin

      This is the company's EBIT expressed as a percentage of its revenues. It is a gauge of a company's efficiency. A high EBIT margin suggests that a company is achieving success in keeping its costs low.

      Gross margin

      The gross margin is the company's gross profit as a percentage of its sales. The gross profit is the amount left over after deducting from a company's sales figure its cost of sales: that is, its manufacturing costs or, for a retailer, the cost of purchasing the goods it sells. The cost of goods sold figure does not usually include marketing or administration costs.

      As there are different ways of calculating the cost of goods sold figure, this ratio is best used for year-to-year comparisons of a single company's efficiency, rather than in comparing one company with another.

      Many companies do not present a cost of goods sold figure, so a gross margin ratio is not given for every stock in this book.

      The revenues for some companies include a mix of sales and services. Where a breakdown is possible, the gross profit figure will relate to sales only.

      Profit before tax/profit after tax

      The profit before tax figure is simply the EBIT figure minus net interest payments. The profit after tax figure is, of course, the company's profit after the payment of tax, and also after the deduction of minority interests. Minority interests are that part of a company's profit that is claimed by outside interests, usually the other shareholders in a subsidiary that is not fully owned by the company. Many companies do not have any minority interests, and for those that do it is generally a tiny figure.

      As much as possible, I have adjusted the profit figures to exclude non-recurring profits and losses, which are often referred to as significant items. It is for this reason that the profit figures in Top Stocks sometimes differ from those in the financial media or on financial websites, where profit figures normally include significant items.

      Significant items are those that have an abnormal impact on profits, even though they happen in the normal course of the company's operations. Examples are the profit from the sale of a business, or losses from a business restructuring, the write-down of property, an inventory write-down, a bad-debt loss, or a write-off for research and development expenditure.

      Significant items are controversial. It is often a matter of subjective judgement as to what is included and what excluded. After analysing the accounts of hundreds of companies while writing the various editions of this book, it is clear that different companies use varying interpretations of what is significant.

      Further, when they do report a significant item there is no consistency as to whether they use pre-tax figures or after-tax figures. Some report both, making it easy to adjust the profit figures in the tables in this book. But difficulties arise when only one figure – generally pre-tax – is given for significant items.

      In normal circumstances most companies do not report significant items. But investors should be aware of this issue. It sometimes causes consternation for readers of Top Stocks to find that a particular profit figure in this book is substantially different from that given by some other source. My publisher occasionally receives emails from readers enquiring why a profit figure in this book is so different from that reported elsewhere. In virtually all cases the reason is that I have stripped out a significant item.

      Earnings per share

      Earnings per share is the after-tax profit divided by the number of shares. Because the profit figure is for a 12-month period the number of shares used is a weighted average of those on issue during the year. This number is provided by the company in its annual report and its results announcements.

      Cash flow per share

      The cash flow per share ratio tells – in theory – how much actual cash the company has generated from its operations.

      In fact, the ratio in this book is not exactly a true measure of cash flow. It is simply the company's depreciation and amortisation figures for the year added to the after-tax profit, and then divided by a weighted average of the number of shares. Depreciation and amortisation are expenses that do not actually utilise cash, so can be added back to after-tax profit to give a kind of indication of the company's cash flow.