Re: Calculation of Capital Employed from published balance sheets
Posted: May 24th, 2018, 11:09 am
I agree with what you say. Actually what we are all illustrating now is that a little knowledge is a dangerous thing.
Dod
Dod
Shares, Investment and Personal Finance Discussion Forums
https://www.lemonfool.co.uk/
Dod101 wrote:I agree with what you say. Actually what we are all illustrating now is that a little knowledge is a dangerous thing.Dod
Dod101 wrote:If you can understand these items you do not need to worry about the mechanical bits like ROCE and the analysis of company accounts. You still need to use your judgement, art not science.
Dod
simoan wrote:EDIT: Also, it's worth pointing out then when you say the ROCE is pathetic, you should not be using ROCE to compare with other companies in different industries. I can almost guarantee the ROCE of Aviva, Prudential, Old Mutual etc. are just as pathetic! If you're going to use ROCE use it to spot trends for the same company or for comparison to companies in the same industry only.
Melanie wrote:Sorry, I shouldn't have used the word pathetic, but rather "small in comparison to others". All of these values need to be taken in context before their numerical value can be judged as good or bad or irrelevant. I didn't think massively about it, and basically just sent my previous post as some point of debate, basically to discover when it's a useful number and when it's not. And of course, comparing like-for-like would be sensible thing to do too.
So fear not we won't be hunting through reams of L&G reports for ROCE data!
thanks again,
M&M
simoan wrote:Nope. I think the correct word to use under normal circumstances for a ROCE of 0.5% is definitely pathetic!!
operating profit / capital employed
Melanie wrote:Right? And we can state that CE = total assets - current liabilities. Well an insurance / pension surely needs to have astronomically sized assets, and I speculate that those would be equity, gilts, cash, bonds, hedge funds etc. etc. and they will put all their customers premiums in those assets. Since those assets are investments, hopefully they'll yield a +ve return, but presumably that is used (in part) to fund the products (insurance payouts, and pension lump sums, etc. etc.) so those returns do not comprise the profit part of L&Gs Balance sheet....since they are handed back to the customers etc. etc.Matt
Melanie wrote:the profit part of L&Gs Balance sheet....since they are handed back to the customers etc. etc.
simoan wrote: I just checked the Phil Oakley book and he covers the topic of debt and the effect on financial ratios very well in Chapter 6. Having had a quick thumb through the book, I'd say that the chapter on debt, including the danger of pension deficits is probably the most important chapter of all, and so well worth reading.
ROE = Net Income / Shareholder’s Equity
ROE = (634.9 / 321.9) * 100 = 197%
Melanie wrote:And is "Shareholder's Equity", the same as the "Total Equity" (== "Net assets") figure which I'm seeing on a firm's balance sheet?
Attributable to owners of the parent 7,843 6,945
Non-controlling interests 38 76 338
Total equity 7,919 7,283
Gengulphus wrote:The figure you want to use is the £7,843m figure for equity attributable to owners of the parent (i.e. Legal & General shareholders), not the total equity of £7,919m. It usually (as in this case) doesn't make much difference, though it could in theory make a difference of a factor of up to 2 (but less than 2 by at least a miniscule amount).
What is going on is that when company A owns more than half of the shares in company B, so that it controls company B no matter what the other shareholders of company B want, company B is counted as a 'subsidiary' of company A, and company A is the 'parent' of company B and indirectly of all its subsidiaries. It has got to be more than half - exactly half the shares isn't quite enough - but just half a share (if the number of shares in issue is odd) or one share (if it is even) more than half is enough. When a parent company's accounts are prepared, the full revenues, earnings, assets, liabilities, etc, of all of its subsidiaries are included (that's what the "Consolidated" in headings like "Consolidated Income Statement" and "Consolidated Balance Sheet" are referring to), but then at the end of those statements the amounts attributable to the other, minority shareholders of any subsidiaries the parent company doesn't own 100% are adjusted out. That's usually only a few subsidiaries, and the percentage of their shares not owned by the parent might be quite small as well, so usually it isn't a very big adjustment - but it could in theory be very nearly half of every subsidiary the parent owns that is adjusted out.
If you don't see such a breakdown in a company's accounts, by the way, don't worry: it almost certainly simply means that all the company's subsidiaries are 100% owned and so no adjustment is needed, and you can therefore use the total equity / net assets figure.
Melanie wrote:Oh my..this analysis has now become very confusing. I now see that in this report whilst there is a consolidated balance sheet (pg 82) (along with corresponding income, and cash flow statements), there is also a parent company balance sheet (pg 119). And I note that the consolidated sheet states only 321.9M of Total Equity, whereas the parent company sheet states 1,445.6M of Total Equity.
Gengulphus wrote:Melanie wrote:Oh my..this analysis has now become very confusing. I now see that in this report whilst there is a consolidated balance sheet (pg 82) (along with corresponding income, and cash flow statements), there is also a parent company balance sheet (pg 119). And I note that the consolidated sheet states only 321.9M of Total Equity, whereas the parent company sheet states 1,445.6M of Total Equity.
The parent company balance sheet is for the parent company's assets and liabilities only, without the subsidiaries, and (without looking - I'm short of time) that presumably means that the subsidiaries have negative net assets / equity, i.e. more liabilities than assets.
Gengulphus