Understanding and using accounts for wealth research
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Understanding and using accounts for wealth research. Christopher Murphy Ravensbourne Research Limited. Topics. Business vehicles Types of share Options Valuing businesses Data sources. Limited liability. many businesses (and nearly all those of much size) have limited liability

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Understanding and using accounts for wealth research

Understanding and using accounts for wealth research

Christopher Murphy

Ravensbourne Research Limited


Topics

Topics

  • Business vehicles

  • Types of share

  • Options

  • Valuing businesses

  • Data sources


Limited liability

Limited liability

  • many businesses (and nearly all those of much size) have limited liability

  • their owners stand to lose only their investment in the business if things go wrong

  • so their personal assets are safe from creditors


Limited companies

Limited companies

  • denoted by word ‘Limited’ or ‘Ltd’ in their name

  • warns other parties that the owner’s liability is limited to their investment in the firm

  • potential creditors thus know that the owner’s personal assets cannot be seized if the company doesn’t pay what it owes


Limited by guarantee

Limited by guarantee

  • over 90,000 companies have no share capital

  • the liability of their owners (‘members’) - ‘guarantors' as opposed to ‘shareholders’ -is limited by guarantee

  • a popular legal form for charities, educational bodies


Limited by shares

Limited by shares

  • far more common (well over 2 million of them)

  • liability of the members – ‘shareholders’ – is limited to the nominal value of their shares

  • nominal (‘face’ or ‘par’) value of shares is very different from their market value

    • shares with nominal value 10 pence each, currently being traded on stock market at 643 pence


Limited liability partnership

Limited Liability Partnership

  • LLP form available since 2001

  • limited liability for non-negligent partners

    • but not for those judged negligent

  • has proved very popular (over 40,000)

  • treated like companies for filing purposes, thus have to file accounts


Llp designated members

LLP ‘Designated Members’

  • there must be at least two

  • they are responsible for company secretary type duties

  • all members may be designated members


Limited companies1

Limited companies


Public and private companies

Public and private companies

  • public companies may offer shares to public

    • ‘Public Limited Company’ or ‘PLC’

  • private companies may not

  • tighter rules apply to PLCs


Exemptions from disclosure based on company size

Exemptions from disclosure based on company size

  • size of PLCs irrelevant - no exemptions

  • nor for large private companies

  • medium and small companies get disclosure exemptions - if they choose to claim them


Disclosure requirements for small companies

Disclosure requirements for small companies

  • must file a balance sheet

  • need not file

    • profit and loss account

    • directors’ report (though these are usually filed voluntarily)


Definition of a small company

Definition of a small company

  • meets at least two out of three conditions

    • turnover (sales) doesn’t exceed £5.6 million

    • balance sheet total (i.e. either total assets or total liabilities) doesn’t exceed £3.26 million

    • average number of employees doesn’t exceed 50


Bad news for researchers

Bad news for researchers

  • full accounts filed by just 1 in 8 actively trading companies


Listed plcs

Listed plcs

  • only PLCs may join London Stock Exchange

  • thus becoming a ‘listed company’

  • however most Plcs are not listed

    • only about 2,000 out of 8,300


Quoted companies

Quoted companies

  • ‘listed’ and ‘quoted’ used virtually synonymously, but a distinction can be made

  • companies may choose to be quoted on markets other than the London Stock Exchange, e.g.

    • PLUS Markets Group (formerly Ofex) quotes share prices for over 100 UK companies

    • NASDAQ OMX

  • while not listed their shares are ‘quoted’ and more data is available


Understanding and using accounts for wealth research

  • Business vehicles

  • Types of share

  • Options

  • Valuing businesses

  • Data sources


Types of share

Ordinaryshares

most common type

also called ‘equity’ shares

usually carry voting rights

last in queue for dividends

Preference shares

don’t have voting rights

pay a fixed dividend

preference share dividends paid before ordinary ones

Types of share


Other types of preference share

Other types of preference share

  • cumulative preference share - get missed dividends from earlier years

  • participating preference shares - get extra dividends in very good years

  • redeemable preference shares


Convertible preference shares

Convertible preference shares

  • ‘convertibles’

  • can be converted into equity shares


Rewards from shareholding

Rewards from shareholding

  • shares are safer, but upside probably limited

  • equity shares more risky, potentially more rewarding

  • convertibles offer a two-way bet


Nominal v beneficial owners

Nominal v beneficial owners

  • nominal owners are those listed in public records like Annual Returns

    • used by large portfolios for administrative convenience

    • and to conceal real owners’ identity


Understanding and using accounts for wealth research

  • Business vehicles

  • Types of share

  • Options

  • Valuing businesses

  • Data sources


Options

Options

  • rights granted to directors to buy a certain number of shares at a set price within a limited period

  • idea is to align individual performance with company’s fortunes

  • when actual share price exceeds exercise price scope for director making a profit


Understanding and using accounts for wealth research

But

  • usually conditional

  • ‘forfeited options’ – lost by director leaving or failing to meet performance targets

  • sometimes they lapse before end of exercise period


Option terminology

Option terminology

  • ‘vesting’ – delay between award of option and them being exercisable

  • ‘partial vesting’ – vested in stages

  • ‘cliff’ – no shares vested in first period

  • ‘submerged’ options – exercise price below option price

  • ‘deemed’ – director doesn’t actually own individually (pension scheme)


Understanding and using accounts for wealth research

  • Business vehicles

  • Types of share

  • Options

  • Valuing businesses

  • Data sources


Many valuation techniques

Many valuation techniques

  • Market Capitalisation (market cap)

  • Earnings and Dividend payout multiples (PER & DPS)

  • Total Shareholder Returns (TSR)

  • Net Asset Value (NAV)

  • Discounted Cash Flow (DCF)

  • acquisition prices paid for comparable companies (comps)

  • sectoral ‘rules of thumb’

  • EV/EBITDA


Even for quoted companies

Even for quoted companies

valuation is a judgement, not a purely objective science


Price earnings ratio

Price earnings ratio

  • probably most common ratio used

  • relates the earnings (profits) a company delivers to the share price (the price for those earnings)


Definition of per

Definition of PER

  • current share price divided by earnings per share

  • i.e. £5/25 pence= PER of 20

  • jargon –’PE’,’20 times earnings’,’multiple of 20’


Private companies

Private companies

  • even more difficult

    • no share price quotations to help us

  • traditional discount of a private company’s value compared with a quoted one


Per for private companies

PER for private companies

  • ‘earnings’ are post-tax profits

  • ‘price’ is what a comparable company is sold for


Understanding and using accounts for wealth research

BDO

  • Private Company Price Index (PCPI) measures trends in prices

  • www.bdo.co.uk/library


But differences in pers

But differences in PERs

  • private company discount usually higher for smaller companies

  • PERs vary between sectors

  • best to look at closest comparators


Bottom line

‘Bottom line’

  • ‘earnings attributable to equity shareholders’

  • could all be paid out (‘distributed’) to the shareholders as dividends

  • but management often ‘retain’ (reinvest in the business) part or all of the profit


Earnings per share eps

Earnings Per Share (EPS)

  • Earnings attributable to ordinary shareholders

    • divided by number of issued ordinary shares


Dividends

Dividends

  • depends on size of ‘earnings attributable to ordinary shareholders’

  • and dividend policy chosen by board

  • measured by ‘Dividends Per Share’ (DPS)

  • individual dividend pay-outs determined by DPS multiplied by number of shares they hold


Understanding and using accounts for wealth research

  • Business vehicles

  • Types of share

  • Options

  • Valuing

  • Data sources


Shareholders

Shareholders

  • individual holdings shown in ‘Annual Return’

  • but may be hidden behind nominees

    • no mechanism for identifying beneficial owners in private companies


Directors report

Directors’ report

  • shows holdings by individual directors

  • in quoted companies lists all shareholders holding over 3% of total voting share capital


Understanding and using accounts for wealth research

Substantial shareholdings

As at 26 July 2010, the voting interests shown below in the ordinary share capital of the Company, disclosable under the Financial Services Authority’s Disclosure and Transparency Rules, had been notified to the Company.


Regulatory news service

Regulatory News Service

  • London Stock Exchange’s RNS shows

  • purchases or sales of over 3% of voting share capital

  • above this movements of 1% up or down in a holding

  • any acquisitions/disposals by a director


Understanding and using accounts for wealth research

RNS Number : 9195H

Leyshon Resources Limited

02 March 2010



Leyshon Resources Limited

Holding in Company

Leyshon Resources Ltd. ("Leyshon") (AIM & ASX: LRL) was informed on 26 February

2010 that Arredo Pty Ltd is interested in 15,000,000 ordinary shares in the Company,

representing approximately 6.94 per cent of the issued share capital of the Company.

For further information contact:

Leyshon Resources

Paul Atherley - Managing Director               

Tel: +86 137 1800 1914                                             

Mob: +61 417 475 038                          


Understanding and using accounts for wealth research

  • [email protected]

  • 020 868 0487

  • 07 525 98 44 32


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