Basics: Pardon The Jargon – 5 Key Company Metrics You Must Know

Bryce: [00:01:31] Episode 20, we're bringing you a podcast where we discuss all things investing, try and break it down to make it easy for you guys. As always, I'm here with my equity buddy Ren. How are you going? [00:01:42][11.0]

Alec: [00:01:43] I am very good Bryce. I can't believe we made it to Episode 20, to be honest. I know what a milestone. [00:01:48][5.6]

Bryce: [00:01:50] Yeah, it's been. It's been fun [00:01:51][1.7]

Alec: [00:01:52] to the next twenty I guess. [00:01:53][0.9]

Bryce: [00:01:54] To the next twenty onwards and upwards. [00:01:55][1.9]

Alec: [00:01:56] Yeah, definitely. Yeah. [00:01:57][1.0]

Bryce: [00:01:58] So we're here to do a basics one on one episode. We haven't done one for a while so we thought it would be a good opportunity. After having a few interviews over the last couple of episodes for us to get back into the basics. And the reason that we kind of started this podcast and we're going to go through a number of, I don't know, jargon, words or acronyms that you would often hear in the media or on balance sheets or, you know, in investment and financial chat. [00:02:30][32.0]

Alec: [00:02:31] Yeah, yeah. This is these are the kind of terms that scare ordinary people away, you know, like things that people who haven't studied finance don't understand and never try to start investing it really, you know, once you dig a little deeper that they're not too hard to [00:02:49][18.4]

Bryce: [00:02:49] understand, nothing scary, scary about them. So we'll break them down for you and tear them apart. So hopefully it will help you make some informed decisions with your investing. [00:03:00][10.7]

Bryce: [00:05:57] So also, we're going to bring back as well. We haven't done for a while the stock of the week. We're going to bring it in a different format. So we'll discuss that later on when we get to it. But let's kick straight into what have we learnt this week, Ren. All right. [00:06:11][14.3]

Alec: [00:06:12] So what I was going to do this week is talk about the end of quantitative easing. Now, that's something that you guys might have heard about, you might have read about or you might have. That is why at the last minute I decided to change, but I'm going to include our good explainer on quantitative easing in the Equity Mates thoughts Dollars email. So if that's the interesting, you want to learn a little bit more, make sure you sign up. [00:06:38][25.7]

Bryce: [00:06:38] Yeah, very exciting and very topical at the moment. [00:06:40][2.4]

Alec: [00:06:41] Yeah, very topical. Yeah. But the reason I changed was last night I was writing an article and I was, I was blown away. Oh wow. So the biggest bank in America, JPMorgan Chase, many people would have heard of, they have a balance sheet that is the size of one of the American economy was so so they're big bank. And as with most big American banks, they were acting fraudulently in 2008. And they I mean, there was a bunch of stuff that there was a lot of fraudulent loans. And, you know, everyone knows what happened in 2008. The housing market collapsed because of the actions of these big banks and everyone suffered the consequences. Well, in the aftermath of the 2008 housing crisis, JP Morgan Chase agreed on to two separate settlements with the Department of Justice in America. Yeah, and it's just come out that in paying these billions of dollars in settlements rather than paying in cash. JP Morgan has actually paid in more fraudulent loans. Well, yeah, I know they're actually just taking the piss at this point. [00:08:02][80.9]

Bryce: [00:08:02] So offloading just a whole heap of junk. [00:08:04][1.9]

Alec: [00:08:05] Well, know it's even worse than that. So in the aftermath of 2008, they tried to get all these terrible loans off their books. So what they did was they sold them for pennies on the dollar to other companies and other mortgage brokers, other investors who then work with these people to restructure their loans and act like there's a whole industry in in this. But that's not important for this story. What's important is JP Morgan Chase sold all of these loans and then in their settlements with the US government, they agreed rather than paying cash, what they would do is forgive loans to the value of the settlement. But rather than rather than forgiving loans that were on the books, what they did was they forgave the loans that they had already sold to other investors and then claimed to the government that that they had written them off their books. And so this is this has been going on for years and years and years. And it's only just broken recently that they've done this. And the only reason it was has broken is one of the people who whose mortgage they sold and then tried to write off as one of their own, lived next door to the speaker of the Maryland parliament, which is madeleines estate in America. And so she spoke to a neighbour and that parliament investigated it that way. But if that coincidence hadn't occurred, they would have got away scot free. [00:09:31][85.8]

Bryce: [00:09:32] Yeah, so so the question in my mind is what's actually going to happen, though? Because it always turns out that in these situations, the big banks just get away with anything and they know as well. [00:09:41][9.4]

Alec: [00:09:41] So, yeah, one [00:09:42][0.8]

Bryce: [00:09:42] hundred is tested to see what happens. [00:09:43][1.2]

Alec: [00:09:44] Well, I mean, it's it's Trump's Department of Justice now, and no one expects Sen. Jeff Sessions to go after those big banks. But in saying that, like Obama's Department of Justice was weak with these banks, you know, like I mean, this this JPMorgan settlement in the first place and the fact that they allowed them to get away with paying with these fraudulent loans that they had already sold and made money off. Or I mean, my biggest bugbear is in 2011, the largest money laundering case ever in history was brought against HSBC. HSBC admitted that they had acted illegally, and yet they No one. Yeah, no one went to jail. They paid a fine. Yeah. [00:10:29][44.2]

Bryce: [00:10:29] You know, it wasn't even a fight. It was a couple of dollars in change. [00:10:32][3.3]

Alec: [00:10:33] Yeah. For them. Yeah, yeah, yeah. It was literally, you know, if you and I start embezzling money or start trying to launder, you know, a few hundred dollars, we could go to jail. But I just say laundered billions of dollars and it was, you know, it was for like the Iranian regime who was under sanctions. And so, like, drug cartels, like it was it was serious money laundering. [00:10:55][21.7]

Bryce: [00:10:55] It suddenly came down on me a couple of days ago from [00:10:58][2.2]

Bryce: [00:10:59] this time in 2015, let it [00:11:01][2.8]

Alec: [00:11:03] go to the banks. If you're a big bank, you could negotiate out of [00:11:06][3.6]

Bryce: [00:11:08] order junk loans back for sure. [00:11:09][1.6]

Alec: [00:11:10] Yeah. So, look, the story here, there's a lot more to it to give another plug to Equity Mates. For starters, I'm going to put the whole article that broke this whole story in the email so you can. Read all about it more and more. Yeah, tomorrow morning when you're listening to this podcast and just to give you one little taste to add to this whole story, there's a bizarre twist in here. And the Church of Scientology is actually complicit with JP Morgan Chase in this fraudulent mortgage payment scam. Really. So that's a little tasa. All of you out there surprised dodgy church. Yeah, I know. A dodgy bank. Dodgy church. [00:11:51][41.5]

Bryce: [00:11:52] Interesting. Well, nice one, Ren. That was interesting. And I just hate hearing things like that as well. I'm pretty sure, to be honest, [00:11:59][6.4]

Alec: [00:11:59] it's like it's like all this credence to when people say, you know, markets are corrupt or there's a two tiered justice system in America. Yeah. Like, I fundamentally disagree that markets are corrupt. I think it's pretty obvious that the American justice system has some work to do. Yes. But, you know, this is these are the things that just make people lose faith in the system. [00:12:23][24.2]

Bryce: [00:12:24] Yeah, definitely. Yeah. Great. Well, my thing that I learnt this week, and this may be old news, but I just stumbled across it doing some writing and I'm sure as a well read man that you are Ren that you know about this. But it's China's Silk Road and it's called the one belt one road development. Yeah. And I just found this really interesting. As I said, I wasn't aware that this was going on. So just in brief, essentially, the one belt, one road is a massive worldwide infrastructure project that the Chinese are essentially funding and pushing. It involves, I think, up to about 65 countries in total. And, you know, the total population rate of all these countries is about four billion because what they're doing is building a whole heap of roads, railways, ports, and then also maritime routes through these old trade corridors that used to be in existence in areas through China and Russia and up through the Middle East into Europe. Yeah. So what I found interesting about this, and I'm sort of thinking and investing, you know, back to Australia, how how can it affect what's going on here? And obviously, that's going to be a huge there is huge demand and will continue to be huge demand for obviously iron ore and natural resources to fight to get steel and whatnot, to actually fund and not fund and build these these projects. So already to date, they have one point three trillion dollars worth of projects initiated. So in development as we speak in Africa as well. And as I said, my major central parts of Central Asia. So. There's a few. Well, two things is, you know, Beijing has their finger in a lot of pies now across the world. And if you to look down the future and say 30 or 40 years when this will be well into existence and and fully up and running, you know, they're going to have control of a lot of infrastructure around the world. But I just thought it was a fascinating project that's underway with trillions and trillions of dollars going to be spent. And it also presents a great opportunity for Australia, not only in terms of, you know, currently what we can give them in terms of natural resources and all that to support the infrastructure. But also, once it's complete, it's also going to open up trade, better trade opportunities for us as well, up through Asia and into into Europe. So I'm not sure if you're aware of that Ren, but yeah, I find fascinating, huge Dollars. [00:15:14][170.3]

Alec: [00:15:15] It is fascinating and it's a fascinating look at China's expanding sort of soft economic power. Yeah, yeah. So you look at you look at some of the countries that it's partnering with and how it's trying to get up into Europe and broaden that trade relationship. It it definitely represents a shift in the sort of. Economic centre of the world, I guess. [00:15:39][23.9]

Bryce: [00:15:39] Definitely tough and [00:15:40][0.8]

Alec: [00:15:41] you could sort of, you know, after World War Two, the US instituted the Marshall Plan, which just invested billions of dollars throughout Europe and rebuilt the world after World War Two, essentially. And it made America the economic the economic focus of the world, essentially. After World War two, you could say this investment is something similar to similar for China. They're trying to, you know, broaden their trade relationships basically with the whole world every day, these investments and essentially with the aim of making them the the economic the focus of the 21st century. Yeah, yeah. Yeah. Because you'll notice if you if you look at a map of the one road, it's one belt, one road or. Yeah, yeah. You say that basically it touches everywhere in the world except the Americas. You get North and South America. [00:16:38][57.3]

Bryce: [00:16:39] Yeah, definitely. [00:16:39][0.3]

Alec: [00:16:40] And don't and don't think that's an accident. Like. No, you know, it's not it's not just they're doing an overland route into Europe. It's a bunch of ports everywhere through the South China Sea, through Asia, into Africa. Yeah, but nothing in the Americas [00:16:52][12.8]

Bryce: [00:16:53] say later America. Yeah. So, no, I agree. And that's what I was saying in 30 or 40 years when this is in full operation like these guys are going to, well, they're going to join so much of it because they're funding all this as well. [00:17:04][10.7]

Alec: [00:17:04] So, yeah, yeah. Yes, it's phenomenal. [00:17:06][1.9]

Bryce: [00:17:07] All right. Well, those are two good things that we've learnt this week and now a little bit smarter than we were before. Well, yeah, necessarily smarter. But, you know, we've I've [00:17:17][10.0]

Alec: [00:17:17] got to say I've got to say, I, I miss the days when we were just talking about Netflix's recommendations are [00:17:22][5.1]

Bryce: [00:17:23] true. I've been too busy [00:17:25][1.2]

Bryce: [00:17:25] reading about one vote one. Right. [00:17:26][1.1]

Alec: [00:17:26] Yeah. Yeah. I think that is probably more valuable for our listeners. So we're getting better at this. [00:17:31][5.2]

Bryce: [00:17:32] I do have a good Netflix recommendation, but also for next episode. [00:17:34][2.7]

Alec: [00:17:35] Oh, no, I'm so sorry about this episode. So people will have to listen for the whole for the whole episode. [00:17:42][6.9]

Bryce: [00:17:43] I'm sure they're hanging out. [00:17:44][1.1]

Bryce: [00:17:46] All right, moving on, I'm going to call this little segment, pardon the jargon. And as we said, a lot Ren that these are this is probably a segment that we will continuously do down the track because there's so much jargon out there that is worth explaining because the jargon is worthwhile and it's worth knowing and understanding. But as you mentioned, Ren, it's so often these sort of words and acronyms and phrases that deter people and throw them off. So pot in the jargon, we're going to look at five acronyms or ways of valuing companies ratios and [00:18:27][40.5]

Alec: [00:18:27] five five pieces of jargon. [00:18:29][1.6]

Bryce: [00:18:30] Five pieces of jargon. Yeah. So as a bit of a caveat, each of these ratios, jargon, whatever we want to call them, definitely needs to be considered in the context of the company because there's no golden number that can be applied to each of these because all companies operate differently. You know, one company may need huge levels of debt to operate, and while the same level of debt may destroy another company, so that will relate to, for example, the debt to equity ratio that we'll discuss later. But the main lesson that we want you guys to get from this segment is just to get an understanding of the fundamentals behind a lot of these metrics that we're going to talk about so that you can start to apply your own thinking. And these metrics, as Ren mentioned, widely used across the industry on balance sheets and reports, that sort of stuff by investors and, well, everyone in the industry essentially. So we're going to put emphasis on, as we said, five. So let's get second. Yeah. To keep us up short. So the first one is called a bit. And it's something that you'll find on a balance sheet when they're reporting net income. So it's an acronym. EBITDA is the bigger version. A bit, Don is a bit, yeah. [00:19:51][81.3]

Bryce: [00:19:52] EBITA, yeah. So you yeah. [00:19:55][3.4]

Bryce: [00:19:55] You'll see this in capital letters, EBITDA and essentially it stands for earnings before interest, taxes, depreciation and amortisation. And it's just a long winded way of saying this is what we have and as a whole before taking out any sort of expenses, taxes, as it says in the in the acronym interest, et cetera. And it gives us an idea of the financial performance of the company. So a lot of investors will look at this to understand the trajectory trajectory of of a company before expenses are taken out. [00:20:34][38.5]

Alec: [00:20:34] So so maybe the best way to consider. That is to understand what isn't taken out, so if you think about your normal company that makes something and sells it the least a bit is the amount of revenue they make from selling the good. And then it includes, you know, the cost of staff, the cost of their buildings, the cost of the raw material, the cost of manufacturing. But then it doesn't include these additional costs of interest payments on debt until taxes and then of depreciating and amortising their assets. [00:21:09][34.4]

Bryce: [00:21:09] Yeah, and just briefly, amortisation is a routine decrease in the value of an intangible asset, or essentially it means paying off debt over time through regular payments. So not worth going into, but that's just what it stands for. So yeah, it's essentially just shows if the fundamentals of the business selling goods, this is what it's making. So you have this on the balance sheet and then it's broken down to Ebbitt EBIT, which is earnings before interest and taxes. So if you're looking at a balance sheet, you'll see a bit first, then they'll take off depreciation and amortisation expenses. Then you'll come to a bit, which is net income interest taxes, as I said, and it's a measure of a firm's profit. And then once you then take out interest in taxes, you will essentially land at a net profit. [00:22:02][53.1]

Alec: [00:22:03] Yeah. And what do you say when you say take out, you mean including in what they're deducting? That's right. Yeah, yeah, yeah. [00:22:11][7.7]

Bryce: [00:22:12] And so you then hit a net profit. So not much to really. I just wanted to give a broad definition of what these are and to actually say what they mean. You'll see it on the profitability part of your balance sheet, but it's just a good indication essentially of the firm's profitability. [00:22:28][16.2]

Alec: [00:22:29] So yeah. So yeah, in in a nutshell, all three metrics try to measure the firm's profitability. Net profit is like actually how much profit they made in that year. And then some investors like a bit and a bit because they think taking out those long lines of expenses gives a more accurate understanding of how the company's actually going. Yeah, know, because like taxes are something that's imposed by the government, they actually aren't reflective of the underlying business performance. Yes. Same as like interest payments on debt or the depreciation of assets. That doesn't actually reflect the underlying performance of the business itself. They're just sort of statutory. Got it. Yeah. Yeah. But yeah, just just be careful about because depending on what metric you're looking at, you're going to see different numbers for profitability. [00:23:22][53.6]

Bryce: [00:23:23] Yes. Yes. And this is where the company can likes to sort of fluff their feathers a bit. Yeah. With these, with these ones. All right. Moving on, Ren. You've got one for us. [00:23:34][10.8]

Alec: [00:23:34] Yeah. So following on from that. So that's a different ways of looking at a company's total profitability, one that you'll say all the time is apurpose now that stands for earnings per share. And so what what that is, is you take the company's net profit and then if if a company pays preferred dividends, you have to take that out. But don't worry about that for that. Just general purposes, earnings per share. You take the company's net profit and you divide it by the total number of shares. Now, this is a really good. Yeah, yeah, it is. And it's a really useful metric when you're trying to compare the price that you pay for a share to how many earnings that you as the business owner of that share of the company earn. [00:24:21][46.9]

Bryce: [00:24:22] So so are you saying that are we talking a dollar figure here or a percentage? [00:24:27][4.6]

Alec: [00:24:27] We're talking a dollar figure here. So let's by way of an example, let's say a company has one hundred shares and made a net profit of a thousand dollars this year. So you take that thousand dollar net profit figure and you divide it by one hundred shares. That means each share is worth 10 dollars of those total earnings. So then you can look at the share price and say, as an investor, what am I willing to pay for that ten dollars worth of earnings? So, you know, if the share price is one dollar and the company has earnings per share of ten dollars, then that's that's great. That's unbelievable. Yeah, yeah. Yeah. But, you know, if the share price is one hundred and fifty dollars for ten dollars a share, then maybe you start to think I might really like the company, but it's got to grow its earnings a lot to be a good value for me. So it's a good it's a good metric to compare to the share price that you're paying. [00:25:32][64.4]

Bryce: [00:25:32] OK, so say for example, we refer to your. Company I and your share comes EPS comes out at ten dollars, but the stock price is one dollar. You know, does that mean it's a certain buy that's, you know what I mean? [00:25:49][16.9]

Alec: [00:25:49] No, no, because, you know, you could you could be paying. This might be a reason and it's only one Dollars. So, you know, it might have a huge amount of debt. And even though it has earnings of ten dollars a share that want to cover its debt repayments or just the interest payments on debt, and so you can say that the company's spiralling into bankruptcy. [00:26:12][22.6]

Bryce: [00:26:13] So this is a measure of the value of the company. If you if you divide shares by [00:26:18][4.6]

Alec: [00:26:19] non-profit, there's there's no there's no magic bullet. There's no this one metric gives a perfectly accurate representation of value. If that was the case, then markets would be perfectly valued and, you know, [00:26:32][12.9]

Bryce: [00:26:32] we wouldn't be doing anything. [00:26:33][0.7]

Alec: [00:26:34] Yeah, well, it would be a lot shorter podcast. It would be episode one. Here's this metric, just the calculator and do that. [00:26:41][7.6]

Bryce: [00:26:43] But this is a very talked about performance metric. [00:26:46][2.7]

Alec: [00:26:46] Yeah, yeah, yeah. A good one. [00:26:48][1.6]

Bryce: [00:26:49] Speaking of shares and returns on shares, that flows in nicely to another ratio known as R e and you can explain. Yeah. [00:26:58][9.6]

Alec: [00:26:59] What that so return on equity ROIC. It's another really common one that you say. Yeah. And essentially it is a measure of how productive a business has been in that year. So what you do is you calculate, they call it shareholder equity, but what it all is, is the company's assets minus the company's liabilities. So whatever it is, whatever that is left over is, is equity shareholder equity. And then you say from that equity base how much net profit it can make. So to give you an example, if if our hypothetical company has two hundred dollars in assets and one hundred dollars in liabilities, then it's shareholder equity is one hundred dollars because it's two hundred minus one hundred. And let's say it makes one hundred and fifty dollars off that one hundred dollars in shareholder equity. Then its return on equity is one hundred and fifty percent because from its base of one hundred dollars of equity that it could use to make a profit, it made one hundred and fifty percent. Yeah. [00:28:04][65.1]

Bryce: [00:28:04] So earnings per share and then return on equity. Can these be you looked at together. Because to the average Joe they seem pretty similar. [00:28:16][11.4]

Alec: [00:28:17] Yeah. Yeah they can be. So a good way of thinking about long term investing and thinking about and trying to find companies that will compound and grow into the future is to look at a company's historic return on equity to, say consistent earnings per share growth as well. Yes. If you're saying those two indicators consistently growing and heading in the right direction, that's a really good indication that you've come across a company that will continue to grow into the future. Yes. And if you just take one of those metrics so let's just say earnings per share is growing really well, but you're not looking at return on equity. There could be other reasons why the earnings per share is growing. You know, it could be taking out a lot of debt. It could be acquiring other companies. But if you look at EPS and return on equity, you can say that it's consistently growing and it's been productive with the assets that it has. So, yeah, they're [00:29:19][62.4]

Bryce: [00:29:20] just very briefly, can you tell us where we can find these two measures? [00:29:24][3.7]

Alec: [00:29:26] Yes, so you can find them on, you can find them on most financial websites, Yahoo! Finance, Google, Finance, some annual reports will have earnings per share. I'm pretty sure that will have a return on equity. Much of them will have a return on equity as well. Yes. [00:29:40][14.6]

Bryce: [00:29:41] And as you mentioned, if they don't, then it's very easy to get a calculator out and do it yourself. [00:29:46][4.9]

Alec: [00:29:46] And it's probably worth saying that the sort of a good company you like an average, the good company gets 10 to 15 percent return on equity a year. Yes. Anything above 20 percent is great killing it. [00:29:59][12.9]

Bryce: [00:30:00] Yeah, yeah. My my sort of figure is roughly 15 percent. I like to say that in a company. All right. So we've talked about earnings per share. We talked about debt to equity. We talked about a bit. So the one the next one that is worth mentioning is known as the debt to equity ratio. This is something that is. Well, you know, another common measure and this one is important because it gives us an understanding of the level of debt to the level of shareholder equity or the level of investment run by a company. Now, this is one that really needs well, they all are. But this one needs to be taken with a grain of salt because there is, as we said, no magic number, because most companies do need to borrow money at some point in time to build and fund operations, continue to expand and grow. And so the debt to equity ratio is not necessarily it doesn't highlight whether or not good debt is good or bad. So that's the main thing to consider with this. Yeah, well, it shows the relationship and the balance between debt to equity, but you need to go and do some further investigation as to if this debt is continuing to improve and grow the company or if it's due to poor, poor management, essentially. [00:31:17][77.3]

Alec: [00:31:18] So, yeah, but even, you know, good debt one day can be bad debt another day. So definitely, you know, it's not even as simple as saying, well, this is, you know, good debt because it could when you get it, it could finance a great new idea. But then interest rates could shoot up and it could all of a sudden be bad debt or what you [00:31:37][19.2]

Bryce: [00:31:37] thought was a good idea tends to [00:31:38][1.2]

Alec: [00:31:39] be. So families would have taken a lot of debt to build masters, which was a great idea. [00:31:45][6.1]

Bryce: [00:31:46] And so fundamentally, the debt to equity ratio is a measure of the company's borrowings expressed as a percentage of shareholder equity, as I mentioned. So it divides total liabilities of the company by shareholders equity. Now, a higher debt to equity ratio means essentially that more bank loans have been used to finance the company's endeavours rather than shareholders equity. So essentially, they have said we need to raise money, we need money to do whatever we need to this project. That could be awesome. So we have two options. One is to go to the bank and ask for money, or two is to get the shareholders to invest more in fund that. So this is what that ratio tells us. How much of each and what is the percentage? So, for example, if the company has a debt to equity ratio of, say, twenty seven percent, it means that 20 percent, 27 percent of the company has been financed by debt and the remaining 73 percent is financed by shareholders. So when investors are looking to understand a company's debt, they'll look at this measure. But as I said, all companies are different as a side note. Banks and financial institutions, you won't be able to find a debt to equity ratio online or on their balance sheets because they're actually the ones doing the lending. So it's subtracted or not not not included when looking at those sort of businesses are actually looking at Commonwealth, for example, you might find a debt to equity ratio because it's not relevant to them. [00:33:16][90.8]

Alec: [00:33:17] Yeah, well, it would be it would be tough to calculate as well, because, you know, when that when we deposit money with those banks, technically they just lost that money and then they want it out. So technically, they'll be in debt to the deposit holders and then. Yeah, anyway, it would be confusing. Yeah, yeah, yeah. [00:33:35][18.0]

Bryce: [00:33:36] So it is possible to have a debt to equity ratio above 100 percent, which would be. Well yeah, it is possible. And as I mentioned, just be aware that a high debt to equity ratio doesn't necessarily mean it's trouble. So I'm thinking of a company say, for example, Transurban, which we mentioned in the podcast before, which needs a huge amount of borrowings and debt to fund their infrastructure developments of highways and roads. But that doesn't necessarily mean that having billions and billions of dollars on their balance sheet is a bad thing for that company. So that's just an extension [00:34:10][34.4]

Bryce: [00:36:03] All right, cool. So that's number four, debt to equity. And then one that I always sort of heard when I was started getting into stocks is to pay ratio. Everyone is talking about it. So Ren, give us a rundown of what is the payout ratio. [00:36:19][15.7]

Alec: [00:36:20] Yeah, so pay a price to earnings ratio. So this is a measure of the share price relative to a company's earnings and it's expressed as a sort of multiple. So if we take our hypothetical company and its share price is ten dollars and the company's earning a one dollar per share, then the price to earnings ratio is ten because the earnings are 10 times the price. Yeah, yeah, yeah, yeah. [00:36:55][34.5]

Bryce: [00:36:55] So this ties back in with your earnings per share that we discussed earlier. [00:36:59][3.2]

Alec: [00:36:59] Yeah, yeah. The reason we use this metric, it's a really quick way of saying the value of a company because, you know, if, if a company is has like fifty eight times price to earnings ratio like A2 Milk does at the moment, you can say it's quite expensive because I am paying for I'm essentially paying 58 for 58 years worth of earnings. But, you know, if a company is has a price to earnings ratio of sort of five, then you can say, all right, well, it's quite cheap relative to the amount of money it's making at the time. [00:37:38][38.3]

Bryce: [00:37:39] So can what is is is there is it good to be? Is it good to have a higher EPS? Is it good to have a I mean, sorry, price to earnings pay? Or do we want to find companies that have a low pay or what should we be looking for? [00:37:53][14.2]

Alec: [00:37:54] Look, it's it's that's kind of like a how long is a piece of string question in in general, it's always better to have a lower price to earnings because it's in theory cheaper. But the issue is, you know, companies that have great growth, growth prospects generally that will be priced in. And so you have to pay a higher price to earnings. You have to pay a higher pay to get in. And, you know, companies with low pay, there's reasons for that. You know, there might be a lot of debt. They might not have good prospects going forward. There might be a competitor that is, you know, strongly nipping at their heels. So just looking at pay alone doesn't really give the whole story. If you if you find a company with great growth prospects and sort of the market hasn't realised that yet. And as a low pay, that's that's sort of the goal, I guess, [00:38:51][56.9]

Bryce: [00:38:52] is one of those ones that it's really important to look at in context. Not only well, it's good to look at in context with companies in the same industry or sector because it helps to give you an understanding of, OK, so if the average pay for, say, companies that provide medical products for hospitals, for example, say there's six companies and they all have an average pay of fifteen and one has a pay of eighty five, that helps to give that number in context. But if you looked at it solely on its own, you can't it's hard to get an understanding of what that actually means. [00:39:29][37.5]

Alec: [00:39:30] So they're they're the five that we wanted to talk about today. Now, I know it was a lot of information. We'll take a quick blog post. That degree explains those five. But just to go over them, it was a bit of a net profit. So different ways of explaining how profitable a company is. Yeah. Number two was earnings per share. So that's taking how profitable a company was and dividing it by the amount of shares there are in the market. Yeah. Third one was return on equity ROIC. And that's about how productive a company is with, you know, the assets that it has that year. And number four is debt to equity ratio. That's a good measure of how much debt the company has and obviously the more. The more worried you should be, unattractively Ren. Yeah, yeah, so that's that's a little bit too general. Debt is sometimes necessary and sometimes important to help manage the debt. Yeah, exactly. And then last but not least, price to earnings ratio. That's just not good. Quick snapshot of how much you have to pay for a year's earnings of that company. Yeah, so they're all terms that you'll see in your financial news articles or annual reports, and they're just ones that are good to know to start doing your own research on different [00:40:58][87.8]

Bryce: [00:40:58] companies and all very easy to find. As you said, Ren, you can get them on any reports or very easily through Yahoo! Finance, Google Finance or whatever it may be. So start getting your head around them and having it play with how they work for the company and then also in the broader context against other companies. And it's a good way to get a snapshot of how the company is going. Yeah, awesome. So moving on, the final segment is one that we haven't done for a while. Stock of the week now. [00:41:25][27.4]

Alec: [00:41:26] Yeah, it's bad. [00:41:27][0.7]

Bryce: [00:41:28] Sorry, it's back and it's in a slightly different format. I think that we took some time to think about this segment and we were not so much concerned, but we didn't want this segment to in any way reflect advice on what stocks to buy. And you don't want anyone going out there and putting all their money in what we have suggested, because that's not why we're here. We're not here to tell anyone what to buy. So the way that we're going to do this segment now is stocks to watch. And Ren and I have obviously a list of stocks that are on our watch list and we play around with them week on week and like finding trying to find different ones here and there. And so we thought rather than specifically discuss one stock, we will have an open discussion briefly and not too much detail about a number of stocks and where we sit and what we think of them. And then we'll choose one of them to add to our hypothetical portfolio that is still running in the background, just to prove well, just to show that, you know, consistency is key essentially. And that's the message I've been trying to focus. [00:42:31][63.6]

Alec: [00:42:32] So, yeah, like, we're we're not trying we're not here trying to pick stocks. We're here trying to show that consistent investment in the market, even by two idiots such as ourselves, will pay off over time. We are. Yeah, well, I mean and like, if you look at our hypothetical portfolio at the moment, you know, there's only one stock that has done really well. The rest is sort of some have gone down, some flop. But overall, the portfolio is up 12 percent. So you don't need to hit a winner every time. You just need to get yourself in the market, give yourself time. Let those companies develop and grow. And, you know, even if you're a couple of idiots trying to do a podcast, you still can make money. You don't have to be a professional. Sitting in front of the three screen trading desk, eight hours a day. [00:43:25][52.6]

Bryce: [00:43:25] Well, as you said, buy and hold, baby. [00:43:27][1.7]

Bryce: [00:43:27] Yeah, set and forget. [00:43:29][1.8]

Alec: [00:43:30] Yeah, that's it. That's it. [00:43:31][1.2]

Bryce: [00:43:32] Yeah. All right. Well, not to flog a dead horse, I'll start. And I think these have always been on my watch list for various reasons, but I've certainly shot to the top just because they've had some phenomenal growth over the last well for one of them since the start of the year and for the other over definitely over the last month, I think it's gone up 30 odd percent. So the first one is Bellamy's Ren. And we've discussed this, I think, on and on and on and on for various reasons. But as I said, it's gone up, I think, about thirty percent in the last month. And that's because recently I think it was late last week, they gave the guidance update, which means that they've come to the market to say that what we originally told you guys we would be earning has now increased. And in keeping with regulation, we need to tell the market about it. And so they said that when that what they originally thought would be five to 15 percent revenue growth for a bit growth, as they said, I think they've now increased to twenty or twenty five percent so that the price shot up. So I mean, it's now ten dollars or ten, ten plus I'm pretty sure coming from a three point base, only a matter of four or five months ago. And for the listeners that have stuck with us since Episode one, they would know that I bought this stock at five dollars, it went to fifteen. It fell through the floor to three point. I then sold it at about five dollars, made mine, made a flat. [00:45:05][92.4]

Bryce: [00:45:05] I didn't make any money from it. So the lesson [00:45:08][2.9]

Bryce: [00:45:09] to learn is that it fell through the floor at three point and you kept the stock in the Ren you also you're also in it. You've kept the stock. So you're now back up in the black. [00:45:18][9.4]

Bryce: [00:45:20] Am not kicking not [00:45:21][0.9]

Alec: [00:45:21] to not to rub salt in your way. Yes, please. But I think just for our listeners, it is a classic example of people. Markets react too strongly in both ways. So, you know, Bellamy's was selling into China a little through this sort of grey market and the price skyrocketed up because the people hurt China. And then the Chinese government started to regulate this grey market and that restricted Bellamy's access to Chinese market. And people just flat out panicked and it dropped from 15 dollars to three. But in both cases, it was an overreaction by the Chinese demand in China. And, you know, over time, these companies will be able to work ways to satisfy that demand. Yeah, I mean, [00:46:11][49.7]

Bryce: [00:46:12] this this whole thing for me has actually been a really good lesson and something that I'll definitely reflect on going into the future. And, you know, everything from, you know, withdrawing the emotion of seeing your stocks go from fifteen to three dollars and actually taking a step back. And we're not even looking at the stocks. Really, that was my first mistake. Yeah. And I should have just stayed in the market because I look at them now killing it. However, I'm not saying that this is one that I will buy back into at the moment. I'm not sure it's trading at a very high, as we mentioned, price to earnings ratio. [00:46:46][34.4]

Alec: [00:46:47] And look, there's there's still risk like the Chinese government may crack down on Bellamy's again and may restrict them. You know, like sometimes those decisions can be quite arbitrary in terms of what can be sold into China and what can't be. But look, at the end of the day, even if they can't keep selling into China, you know, they're they're an Intiman brand. Say there are other markets, [00:47:11][24.1]

Bryce: [00:47:11] 75 or 80 percent of their businesses is domestic anyway. [00:47:14][2.9]

Alec: [00:47:15] So, yeah. So like, obviously China would be when the share price would suffer, but. You know, I'm I'm just going to just buy it and just never look at it again when I retire, hopefully it's gone again. [00:47:31][15.8]

Bryce: [00:47:32] I'm kicking myself. Lesson learnt. So another one that you've also harped on about for a while now and for very good reason at the moment. Ren is on has appeared on my watch list again because I've been watching it go up and up and up is to milk. [00:47:46][13.9]

Bryce: [00:47:47] Yeah. [00:47:47][0.0]

Bryce: [00:47:48] And you've absolutely smashed it with this one. Made a little profit. [00:47:53][4.7]

Alec: [00:47:53] Yeah. So it's my it's my very first 10 bagger, which is when it's gone up 10 times. [00:47:59][5.6]

Bryce: [00:48:00] Yeah. Not more than now. Yeah. But this is a good one to highlight price to earnings ratio because I did a bit of evaluation and this is something I'd like to talk about next episode in detail. But my valuation for this one came out at roughly two Dollars to Dollars 20. Now this. As I said, this is very open to debate and I'm not sure I think that's a little undervalued, to be honest. But it's trading at seven Dollars, I think, or six point ninety eight or something. And this stock has just been running like wildfire. And I have a feeling that it's one of those stocks that is will be the twenty seventeen darling of the market. Everyone's jumping on board at the moment. And it's Spain, I mean, for good reason. It keeps coming up with higher and higher profits and it's expanding into Asian markets and it's in Europe and it's in the states. But I mean, there's some issues around how they're going to get ground control over there. But it's on my watch list. Just because I've looked at it so many times and seen it, it would be a momentum board for me because it's definitely, I think, overvalued and might have a correction. [00:49:03][63.1]

Alec: [00:49:03] Who knows? I mean, it is definitely it's crazily valued like to so we were talking about price to earnings ratio before. It's trading at something like fifty eight times earnings, which is huge. Yeah. Which and you know, the industry standard is sort of 15 to 20. So that gives you an idea of how much hope investors have about the China story, really. And you know, people are investing with the expectation that A2 milk sells very well in China and some other export markets. And that's the only real reason that you could justify paying the current price for. [00:49:41][37.7]

Bryce: [00:49:42] Well, that's the thing. That's the one of the risks that you run when you buy into a stock like this that's running so fast and and at such a high price earnings ratios that mean that they don't meet expectations, market expectations. And it could be a mix of expectations of, say, I don't know, five hundred thousand dollars like nothing, then it's probably going to be one of those cases where it gets punished in terms of stock price. So buyer beware for this one. [00:50:10][28.1]

Alec: [00:50:11] Yeah, definitely. [00:50:11][0.5]

Bryce: [00:50:12] All right. Do you have anything to throw out there? [00:50:13][1.5]

Alec: [00:50:14] Yeah. So there's a couple of stocks I've been looking at this week. One that fascinates me is called Altium. I don't I don't actually write down its stock ticker, but it's I'm sure it would be easy to Google. But what they do so they create software design software for printed circuit boards. Now, printed circuit boards are the backbone of electronics, computers, all the lot. And I was looking at them because it's a good sort of a good way to benefit of the Internet of things. So I'm sure people have heard about smart homes that are coming coming in and they're going to be the next big thing. You know, your fridge will be connected to the Internet and your washing machine will talk to you and all that. Yeah, it's sort of, you know, Google, Google Home and Amazon. Alexa Apple might have one as well. But, you know, they're the sort of they're going to be the control spaces for all of your Internet of Things, connected home devices. You know, you'll tell Amazon or Amazon, Alexa, turn the lights on and your Internet of Things connected lights will turn on. The backbone of all of that infrastructure is these printed circuit boards and Altium market later in the software for to to design a circuit board. So they they fascinate me for that reason. And that, look, they've they've been a strong growing company recently. So from some of the metrics that we talked about before, the price to price to earnings ratio is thirty eight. So it's pretty expensive. OK, just just looking at their debt to equity, they actually have no debt, which is a great sign for a business. It is their return on equity. Last year was twenty percent. So that's that's good. And that earnings per share is fifty six cents. What are they [00:52:07][113.3]

Bryce: [00:52:07] trading at at the moment [00:52:08][0.6]

Alec: [00:52:09] it's about eleven dollars something. OK, so with the price to earnings you let we say this is where it gets confusing and this is why you can't just look at our metrics. Their price to the price to earnings is officially 20, but their price to earnings without non-recurring items is thirty. [00:52:31][21.4]

Bryce: [00:52:32] So I don't think I've ever seen that. [00:52:34][1.7]

Alec: [00:52:34] Yeah, yeah. So, you know, website had it listed. So essentially that means that, you know, one off items in financial year twenty seventeen that improved their price to earnings, so bumped up their earnings a lot, but Dollars, whatever that was, won't be reoccurring going forward. And so that pumps out the price to earnings ratio. So that's something you've got to look for. [00:52:55][21.0]

Bryce: [00:52:56] What are some of the risks for this company? Do they have any major competitors? Do you know? [00:52:59][3.3]

Alec: [00:53:00] Yeah, look, they're a bunch of competitors out there. I one of the risks that I was thinking about also was that how much of this will be automated? Like, yeah. Why do why what at what point will humans not need to design these circuit boards? Yeah, but look, that's probably further down the line that look, the biggest risk at the moment is just that quiet, that they're pretty expensive for their current earnings. But look, they do have great growth prospects. They have an aim to be to have. So they just they just cracked one hundred million dollars in revenue and they haven't aimed to crack 200 million dollars in the next five years. I think it was a three years years. Yeah, they're they're pretty ambitious, as all Silicon Valley companies should be, I guess. But yeah, that was one that really interests me on the Australian stock. Yeah, it's an Australian stock, but they've moved to Silicon Valley like big dogs. Yeah. But, you know, they sell worldwide here. Yeah. So that was one that interests me. It's on my watch list. If it, if it drops in price a little bit might be something that I look to buy. But at this stage it's probably a little bit too expensive. [00:54:12][72.2]

Bryce: [00:54:13] Yeah. Quick calculation based off earnings per share, et cetera. I've come up with eight ninety six. [00:54:17][4.9]

Alec: [00:54:18] OK, that's quick. Yeah. There you go [00:54:21][3.3]

Bryce: [00:54:22] on speedy fingers on the calculator here. Yeah. [00:54:24][2.0]

Bryce: [00:54:25] Yeah, yeah. [00:54:25][0.3]

Bryce: [00:54:26] So speaking of, I mean the Internet of Things are sitting on the balcony yesterday and opposite our place places a bunch of apartments and I heard a lady at the top of the apartment yell from her balcony, [00:54:38][12.0]

Bryce: [00:54:38] Google, turn it off. Then that stopped. I was like, there you go. It's happening. It's around. [00:54:44][5.4]

Alec: [00:54:44] Yeah, yeah, yeah. What are we going to do, though, is we've got to decide on one to put in the portfolio. [00:54:49][5.3]

Bryce: [00:54:50] Well, I mean, based on what we've discussed, I don't think Pelamis or it could be a good idea at the moment. [00:54:55][4.9]

Alec: [00:54:56] OK, so what [00:54:57][0.8]

Bryce: [00:54:58] through through a process of [00:54:59][1.7]

Bryce: [00:55:00] elimination it lays out to you. Yeah. [00:55:02][2.9]

Alec: [00:55:03] Altium, I guess. Yeah, it's a little bit expensive we just talked about, but [00:55:06][3.1]

Bryce: [00:55:06] not as oh I'm more confident with it than, than me. OK, I'm also not interested in it. [00:55:13][7.0]

Alec: [00:55:14] Yeah. That's the thing. It is interesting. All right, well we'll check that one in and hopefully the CEO's prediction of two hundred million dollars. It comes to myself. [00:55:23][9.4]

Bryce: [00:55:24] Yeah. Yeah. [00:55:25][1.0]

Bryce: [00:55:25] We've we're going through a bit of a website at the moment, and I don't think the stocks of the Week portfolio is visible online, but I'll make sure that we get that up in the next few days for everyone to refer back to. So, yeah, that's the promise to you guys. [00:55:42][16.2]

Alec: [00:55:43] Yeah. Yeah. Bryce Leskie products. [00:55:44][1.4]

Bryce: [00:55:45] They read this on the podcast. OK, so in [00:55:50][4.5]

Bryce: [00:55:50] summation, we've discussed obviously what we learnt this week, but then pardon the jargon, we went through five investing terms that are relevant and important when looking at a company and they're very easy to find online and through company reports and reports, that sort of stuff. We looked at a bit earnings per share, return equity debt to equity ratio and prosper earnings and then wrapped up with stocks to stocks on our watch. So I hope you guys learnt some stuff through this episode. And as we said at the start, we're now on YouTube, so check us out. [00:56:23][32.7]

Alec: [00:56:24] Yeah, well, YouTube official guide we're on. We're everywhere [00:56:27][3.0]

Bryce: [00:56:28] now. You be. [00:56:28][0.8]

Alec: [00:56:30] Yeah. Netflix miniseries coming that [00:56:32][2.4]

Bryce: [00:56:33] we're on and [00:56:34][1.3]

Bryce: [00:56:35] Ren is going to be flicking out the Equity Mates thought started on Sunday or Monday. [00:56:41][6.3]

Alec: [00:56:41] Ren sorry, Monday. Monday morning. Yeah. Make sure you're [00:56:45][3.2]

Bryce: [00:56:45] on five and. [00:56:46][0.8]

Alec: [00:56:47] Yeah, yeah. Make sure you sign up because we've got some cracking articles coming out this week, including the the Church of Scientology twist on the JP Morgan Chase story that I told this morning. Change. I mean, look [00:57:02][15.3]

Bryce: [00:57:03] forward to this. [00:57:03][0.4]

Bryce: [00:57:05] So, yeah, definitely sign up because this is going to be a very valuable tool for you guys. I think it's something that we're going to put a lot of time and energy in because we think it's going to be of great benefit to you guys. So sign up for our website or for. Our Facebook page, and don't miss your every Monday something to keep you going through the week. So yeah, great to have you for Episode 20. Enjoy your weekend. Well, by that time, you probably already had it, but do you enjoy your weekend Ren. [00:57:34][29.5]

Alec: [00:57:35] Thanks. You your. [00:57:36][0.6]

Bryce: [00:57:36] And we'll talk to you next episode [00:57:39][2.6]

Alec: [00:57:40] of like Equity Mates [00:57:42][1.4]

Bryce: [00:57:43] you Equity Mates. [00:57:45][2.0]

Speaker 7: [00:57:45] And the people appearing in this programme may have positions in the companies mentioned. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [00:57:45][0.0]

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