You will be able to name the measures analysts watch for four industries whose accounts work differently.
Marcus tried to build a comps table for his bank shares the way he'd built one for Larkspur, and gave up before he reached EV/EBITDA. A bank has no meaningful EBITDA, because interest is its main revenue and its main cost. Lesson 8.7, Valuing banks and REITs, where a standard DCF breaks, showed why a bank needs its own valuation method. Banks are not the only exception. Four kinds of business report figures that the tools from modules 7 to 9 read badly, and analysts who cover them watch a handful of industry measures instead.
This lesson gives you those measures. All figures are made up.
A bank borrows from depositors and lends at a higher rate. Five measures cover most of what an analyst watches.
Net interest margin is net interest income, the interest earned on loans and securities minus the interest paid on deposits and borrowing, divided by average interest-earning assets. A bank earning net interest income of S$2.2 billion on S$100 billion of such assets has a margin of 2.2%. Because Singapore rates follow US rates, as lesson 4.6, Singapore's exposure as a trade and financial hub, explained, local banks' margins have tended to rise with US rates and fall when rates fall.
Loan growth shows how fast the balance sheet is expanding, and it needs reading against the next measure, because fast growth can mean lending standards have slipped. Credit costs are the provisions for bad loans, as a share of average loans, quoted in basis points. Provisions of S$200 million on S$100 billion of loans are 20 basis points, or 0.2%. A rise in credit costs comes straight out of profit and usually arrives in a downturn, when margins are falling too.
Capital ratios measure how much loss a bank can absorb. The main one, the common equity tier 1 ratio, compares the bank's core equity with its risk-weighted assets. MAS sets the minimum for Singapore banks, so look up the current requirement on its website rather than trusting a figure you've read elsewhere. Return on equity then ties it together. Lesson 8.7 found that a bank's fair price to book depends on whether its return on equity beats its cost of equity through a credit cycle, and these five measures are how you judge that.
General insurers sell cover for cars, homes, travel and businesses, usually for a year at a time. Their main measure is the combined ratio: claims plus expenses, divided by premiums earned. An insurer that pays 65 cents in claims and 30 cents in expenses for every dollar of premium has a combined ratio of 95%, which means it makes 5 cents of underwriting profit per dollar, before any income from investing the premiums. Above 100%, it loses money on the insurance and relies on investment income to make up the gap. Watch the trend over several years, since one bad storm season can swing a single year.
Life insurers sell policies that last decades, so a single year's profit says little. Analysts use embedded value: the insurer's net assets plus the present value of future profits from policies already sold. They also watch the value of new business written each year, which shows whether the company is adding to that embedded value or living off its past.
A miner, an oil producer or a palm oil planter sells something it can't price. The world market sets it. What it controls is its cost, so the main question is where it sits on the industry's cost curve. A producer whose cost per unit sits in the cheapest quarter of the industry stays profitable when prices fall, while one in the most expensive quarter loses money first. Gold miners report a standard measure for this, all-in sustaining cost per ounce, and other industries have their own versions.
The second measure is reserve life: proven and probable reserves divided by yearly production. A mine with 120 million tonnes of reserves producing 8 million tonnes a year has 15 years left at its current rate. A producer with a short reserve life must spend heavily to find or buy more, so its free cash flow today overstates what it can keep paying. Lesson 9.2, When each multiple misleads: cycles, leverage and accounting, applies here in full. Commodity producers are the cyclical companies whose P/E looks lowest at the top of the price cycle.
A software company selling subscriptions spends heavily up front to win customers, then earns from them for years. Its income statement often shows losses while the business underneath is healthy, or profits while it's quietly shrinking.
Analysts start with annual recurring revenue, the yearly value of subscriptions in force. Then retention, usually net revenue retention: this year's revenue from customers who were there a year ago, divided by last year's revenue from the same customers. If a group of customers paid S$10 million last year and S$11.2 million this year, after upgrades, downgrades and departures, net retention is 112%. Above 100%, existing customers grow on their own.
The last measure compares what a customer costs to win with what they bring in. Say winning a customer costs S$1,200 in sales and marketing, and the customer pays S$100 a month at a 75% gross margin. The company recovers its cost in 16 months. If 2% of customers leave each month, the average customer stays about 50 months and brings in about S$3,750 of gross profit, a little over three times what they cost to win. When that ratio falls, growth is getting more expensive, even if revenue still rises.
For any company outside ordinary manufacturing and services, find out which measures its industry's analysts watch before you trust a standard multiple. The results presentations of large companies in the sector usually lead with them, and the same measures appear in broker reports and industry body publications.
Choose one company from one of these four industries and open its latest annual report or results presentation, ready to find the three measures its analysts would check first.
Pick one company in one of these four industries and find its three main industry measures in the latest report.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).