Investor's college

Top 5 financial ratios: Manufacturers

We continue our top 5 financial ratios series with a look at manufacturers. And you thought they’d all moved to China.

Last issue, we kicked off an extended series revealing our top five ratios for various important industries. The series opener focused on listed property trusts, a fairly generic bunch. Today, we’re considering a far more diverse category, one that incorporates almost all companies that make ‘stuff’ – manufacturers.

This category doesn’t lend itself to a one-size-fits-all approach as neatly as property trusts. But because the sector includes some outstanding companies that don’t logically fit under any other category, we thought it important to undertake the task early in the series. From our current Buy list alone, this article will be helpful in...

Top 5 financial ratios: Listed property sector

In the first of our series revealing the top five ratios for each industry, we show you how to assess an investment in the listed property sector.

‘The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.’

In penning those words, English writer G K Chesterton inadvertently laid out the case for avoiding investments based solely on the numbers in a few annual reports or a prospectus. Such numbers merely reflect historical performance which, as the footnotes explain, may not be a reliable guide to the future.

However, a basic...

Weighing up ROA, ROE and ROCE part two

In part one we showed how to gauge the quality of a business using ROA. In part two, we weigh up its close cousins, ROE and ROCE, which focus on shareholder returns.

In part one, we showed how return on assets (ROA) can expose low quality businesses, and why it’s useful when comparing companies and management within similar industries. However, like all mechanical ratios, it has flaws, such as ignoring the impact of debt and taxation.

Return on equity (ROE) and return on capital employed (ROCE) pick up where ROA leaves off by measuring returns accruing to business owners. Unlike ROA, they account for lenders’ and the tax man’s share of company profits. But these ratios also have flaws, which we’ll illustrate in this review with some examples. To tee off our analysis, let’s calculate plain old ROE.

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