This article is more suited to experienced investors.
When investors are examining the financial performance of a company they will usually look at it on a yearly basis. They also often look at trends in key measures from year to year over a period of time.
This is a perfectly sensible way to go about analysing a company and is something I always do myself. But why stop at annual performance when trying to weigh up whether a company might be a good or bad investment? After all, changes from one year to the next rarely tell you how successful or otherwise a company has been.
One of the things I like to do in addition to basic annual and trend analysis is to look at companies over a five year period. I find five years as a reasonable length of time to see if a company's strategy is working or not.
This kind of simple analysis can be extremely powerful and revealing and is actually very simple to carry out. It can be done with a pen, a piece of paper and a calculator. Alternatively, you could use a spreadsheet.
In this article, I am going to show you how it can be done in SharePad. The appeal of using SharePad for this type of analysis is that once you have set up the calculations you don't have to do them again. You can then easily apply the same analysis to any share or group of shares.
Above is a table of the FTSE 350 Food and Drug retailers sector. You can create it in SharePad by doing the following steps.
I've added columns showing me the change in Turnover, EBIT, Capital employed and Free cash flow (FCF) over the last five years. I've also added the cumulative Free cash flow generated and Dividends paid over the same period.
In SharePad, it is very easy to get the absolute changes in the value of financial variables over a range of up to ten years.
For example, subtracting the 5y ago turnover value from the current turnover value will give you the increase/decrease in turnover over the 5y period.
You do this using the Combine item feature in the Add column function as shown below.
To get a measure of cumulative financial data, simply select Cumulative in the Add column dialog and select the number of years you want that cumulative data for as shown below.
What I am looking for is the change in value of these key variables to give me a better picture of how a company has been getting on. I find it really useful in giving a company's financial performance a much wider perspective.
Let's look a bit more closely at some companies in the sector. Booker (LSE:BOK) has performed very well over the last five years. I can quickly see that during the last five years:
These figures all look very encouraging, but I can get even more information out of them by calculating some five year financial ratios based on these changes:
I can then put this into context with the trend in the company's annual performance (I've used a custom results table in SharePad to show these below). It is clear that over the last five years Booker's additional capital invested has been earning higher profit margins, ROCE and free cash flow margins than the underlying business as a whole. As a result, those key performance measures have been trending up.
This analysis is very useful in helping to focus your research efforts on the company and could include the following questions:
Don't worry if you don't know how to answer the questions above - as I said at the beginning of the article, this is quite advanced analysis.
At the opposite end of the performance scale is Sainsbury's. Here we can see that over the last five years:
This looks like a classic case of value destruction. Nearly £3bn of extra money (including rented assets) has produced a fall in profit and £500m of cash flowing out of the business. The company has clearly been borrowing - or relying on asset sales - to pay its dividends as it has not generated anywhere near enough free cash flow.
Its five year financial ratios are:
Unsurprisingly, Sainsbury's financial performance has been getting worse. It has been throwing good money after bad which begs the following questions:
By looking at absolute changes in values over five years you can get a clear picture of how good or bad a company's or sector's financial performance has been. The dire state of the food retail sector is made abundantly clear with this type of analysis.
If you need any help setting up a sector filter, columns or custom results table in SharePad, please call our friendly support team on 020 7749 8555. Or use the video tutorials in our SharePad Training Zone.
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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.