Ratios

Along with company overview section of the Facts Report the Ratios box is intended to give a quick overview of a company's investment potential. The twelve ratios are from a combination of the profit and loss account, balance sheet and cashflow statement and provide a detailed insight into the company's current performance. With any figure or ratio it's a good idea to put it into context.The sector and market average figures allow you to do exactly this.

Technical Definitions

Sector and Market Calculations

The calculation of both of these figures comes in three stages. We will use Price to Sales Ratio (PSR) as an example:

1. Firstly we calculate a PSR for all companies within the Hemscott universe;

2. Next we eliminate all of those companies with a statistically significant PSR. The reason we do this is to remove any company that has an above average or below average figure that in turn skews the overall ratio for the market or sector.
   
   We do this by taking our population of companies (P) and turn it into a normal distribution by applying the natural log:
   
   P' = ln ( abs (p) )
   
   Now we calculate the mean standard deviation (std dev) of P':
   
   Mean = m' = av (P')
   
   Std Dev = s' = std dev (P')
   
   Finally we form a subset of P' denoted by:
   
   M' ± 1.96.s'
   
   Overall this means that we remove any company that falls outside of 95% of the populations standard deviation.

3. Finally we take our population of PSR's and give them a weighting by market capitalisation. We do this by:

   From the above box BOC Group (BOC) has a PSR of 1.21. Using the Chemicals sector (which BOC in included) as an example we take all of those PSR's (column B) and multiply them by the company's market capitalisation (column C) to give a PSR x Mkt Cap figure (column D).

   

   The numbers in column F, above, are the weighting of a company's PSR within its sector. These are calculated by dividing the PSR x Mkt Cap figures in column E by the sum of the Market Capitalisations for that sector (bold figure at the bottom of column D).
   
   Finally all of the figures in column F are added together to give the sector average PSR, in this case 1.36.
   
   To calculate the figure for the market as a whole we use exactly the same process but we use all companies in the Hemscott universe and not just a specific sector.

Prospective Figures/Time Apportionment/Rolling 12 Month Ahead Basis

All growth statistics are calculated on a rolling 12 months ahead basis. The reason we do this is to make all our figures comparable, so for example, for a company with 31st October financial year its necessary to take a quarter of the current year's brokers' consensus forecast and three quarters of the consensus forecast for the following financial year. By adopting this approach for all companies, chalk and cheese are converted into chalk and chalk, enabling tables to be prepared and meaningful comparisons to be made. The diagram below explains the concept more fully: