Jake's View

Confused by questions written in ‘investmentanalish’? Then my best advice is do nothing

Let’s forget these ‘before this, that and the next...’ measures of a company’s performance, and stick to earnings as classically stated in the profit and loss

PUBLISHED : Wednesday, 31 August, 2016, 4:53pm
UPDATED : Wednesday, 31 August, 2016, 10:59pm

Blended forward 12-month pricing of [Sinopec’s] enterprise value relative to Ebitda is the lowest of any major integrated oil and gas business after Gazprom, Rosneft and Eni, according to data compiled by Bloomberg.

- by Bloomberg, SCMP Business, August 31

Oh, what a widespread language “investmentanalish” has become. It is no longer confined to smart stockbroker presentations that no one understands.

No, now it is spoken fluently even by deskbound word preparation technicians in the depths of the Bloomberg number production factories.

I spent 20 years in the investment analyst business and I shall now parse this jargon for you: The easy and obvious way to calculate a company’s total value is to multiply the number of shares in issue by the latest share price. The resulting figure is called market capitalisation.

Enterprise value is a fancy equivalent of market capitalisation. It assumes that the share price on the stock market is usually too low and the real value of a company is what some other company might be willing to pay in a takeover bid.

The whole point of going into business, you see, is exit strategy – getting back out of business.

Thus for enterprise value you take market capitalisation plus debt, because the acquirer will have to assume the debt, but less cash because the acquirer will take it and keep it for himself. You also make some other tweaks. We shall ignore them.

And now for Ebitda. This stands for earnings before interest, tax, depreciation and amortisation. It is similarly a tool for those who consider business the unfortunately necessary but hopefully only briefly endured means of acquiring a big white boat and then drinking themselves gaga on it.

The whole point is to paint a picture of how well the company is doing as an ongoing business after making provision for all foreseeable costs that could come its way

I prefer earnings, without any “before” – earnings as classically stated in the profit and loss account.

The whole point is to paint a picture of how well the company is doing as an ongoing business after making provision for all foreseeable costs that could come its way.

But I concede, that if you are only looking at a two- or three-year career of ramping the share price then you really need not, for instance, consider the declining financial life of the company’s assets. You will be gone anyway before they are amortised.

The “blended forward 12-month pricing” means that the Bloomberg technicians calculated an average of the ebitda forecasts made by investment soothsayers who cared to send them their guesses. I also use a blender. It’s in our kitchen.

So there you have the Bloomberg version of a price/earnings ratio. It is used in this case to say that Sinopec is almost as cheap as two Russian oil and gas stocks and one Italian.

I am in no position to say anything of this. I’m a holder of a Russian equity fund and rarely have I dug myself into so deep a hole.

But a word of caution nonetheless. This kind of convoluted jargon is talked mostly by stockbrokers, private bankers, personal financial advisers and attendant sycophants in the media.

Its underlying purpose is to convince you that successful investment is the business of constantly whirling in and out of markets. This is what makes these people their money. You’re the Sahara desert to them if you don’t deal.

Take for instance another excerpt from the Bloomberg piece I quoted above – “Judging by the way Sinopec stock has been trading for the past four months, long positions might be in for a wait before cashing out.”

Leave alone the notion that the future is to be known by reading tea leaves – “Judging by the way Sinopec stock has been trading ...” – who says that long positions (ie holders of the stock) should sell their holdings when the share price rises again?

If they see continued trouble ahead, should they not sell now, always assuming, of course, that they can be sure the share price has not already discounted this trouble?

And if the share price rises, might it not mean that the future has significantly brightened, in which case should they not keep the stock, always assuming that the share price has not taken too great an account of good news to come?

These are the persistent questions of investment. In my view they are on most occasions best answered by doing nothing.