| Calculating the ratios

Figures in tables provided by McGregor BFA were calculated according to the principles and definitions below.

Published consolidated audited financial statements received and analysed before end-January 2010 were used.

For certain companies with financial year-ends towards the end of the calendar year statistics may thus refer to financial years that ended in 2008.

Provisional or unaudited figures and interim reports aren’t taken into account, as they often don’t contain enough detail to satisfy the requirements of the detailed analysis.

Consequently, the analysis and ratios are unavoidably dated.

For example, a company’s figures for the year to end-December 2008 will be more than a year old by the time this publication is distributed and much can change in 12 months.

Standardisation of financial data
In the process of standardising the financial statements of companies, the actual published figures are changed according to fixed standardisation rules developed by McGregor BFA.

So it therefore makes adjustments to the figures published by companies.

The reason is that the accounting conventions used by companies differ, making it practically impossible to rank companies using the published data.

The JSE-listed companies to be compared are diverse.

It’s impossible to describe (in a few words) what’s done with each financial item in the process of standardisation to achieve comparability.

However, basic accounting principles are followed. 


The definitions used in calculating the various ratios are briefly described below.

Due to the large number of ratios and other financial data presented here the basic principles are given in most cases without going into detail.

Internal rate of return

The internal rate of return (IRR) is a market-related return that takes into account both share price movements and dividends paid – by way of a discounted cash flow calculation.
The share price five years ago (end-December 2004) is taken as a cash outflow and all annual dividends for the next five years (both cash dividends and dividends in specie), as well as the share price at end-December 2009, are taken as cash inflows.

The IRR is then quantified by finding the discount rate that equates the current value of all dividends and the share price at end-December 2009 with the share price five years ago.

All data is adjusted for share splits and share consolidations.

Return on equity to cost of equity

An alternative to calculating the market value to book value can also be to divide the cost of equity (Ke) into the return on equity (RoE).

A value of less than one indicates management is destroying value (actual return, RoE, is lower than the market-based required RoE, Ke), while a figure of larger than one indicates shareholders believe management is using capital in a manner that instils confidence in the company’s share price and is, therefore, creating value (actual return, RoE, is higher than the market-based required RoE, Ke).

The methodology used in calculating that value-based indicator is as follows:

  • The RoE is calculated in the normal manner by dividing the profit attributable to ordinary shareholders by the total book value of ordinary shareholders’ equity.
  • The Ke is quantified by using the well-known capital asset pricing model, which is expressed as: Ke = Rf + Beta (Rm – Rf).Where: Ke = Cost of capital.
  • Rf = the risk-free RoE (the R157 Government bond is used).
  • Beta = a measurement of market risk.
  • Rm = Expected market return.
  • (Rm – Rf) = Market risk premium (6% used as default throughout).

Gold companies and financial companies

The structure of the standardised financial statements in the database of McGregor BFA differs between gold companies and all other companies.

The difference in structure applied to gold companies makes the meaning and quantification of ratios comparable with other companies.

Financial companies are also treated differently in defining the various ratios.

Care has been taken to maintain the comparability of measures.

For example, all ratios and monetary values that include any profit figure are calculated before taking extraordinary and exceptional items into consideration.

Naturally, those items include the profit/loss of transactions in the financial markets.

Those transactions have been treated as “in the normal course of business” for financial companies but as extraordinary with all other companies.

Second, as no turnover in the normal sense exists for banks the total of interest received, commission earnings, currency exchange earnings and other fee earnings have been used in place of turnover.

Total assets

Fixed assets and current assets are included. Investments are at market value or directors’ valuation.

Other assets, such as land, are at book value.

Where revaluations aren’t taken into the balance sheet those are ignored.

Where cash balances are netted off against bank overdrafts the cash balances are added back.

Tax paid in advance is netted off against tax payable and only the net amount is included.

Cost of control and intangible assets – such as goodwill, patents and licences – aren’t included; but mining assets are.

Where amounts invoiced on contracts in progress exceed the value of the contracts in progress the difference is included with retained income.

If the amounts received consist of deposits the difference is included with creditors. Inventories are adjusted to reflect average value.

Equity funds

Equity funds (ordinary shareholders’ funds) consist of ordinary share capital, capital reserves and distributable reserves, adjusted for the same items as the total assets above.

Provisions included with credit balances – such as warranty provisions, provisions for self-insurance and provisions for maintenance – are included with long-term loans or creditors in the case of short-term provisions.

Deferred tax is regarded as retained profit.

As cost of control and intangible assets isn’t included with total assets, both are deducted from equity funds.

Net profit

Taxed profit attributable to ordinary shareholders, excluding extraordinary items, is used.

Deferred tax and amounts transferred to reserves are regarded as retained profit. Also excluded are items such as cost of control written off and prospecting expenditure.

The pre-tax difference in profit between Lifo (last in, first out valuation of inventory) and Fifo (first in, first out) or average inventory values is added to net profit.

Pre-tax profit
The effect of extraordinary items is excluded in pre-tax profit (profit after interest paid but before tax).

Extraordinary profit is also excluded from profit before interest and tax (operating profit) and also from EBITDA.

Earnings per share

Headline earnings per share as published by the company are used in all instances.

Where historical EPS (as in the case of growth in EPS) are used they’re adjusted for stock splits and consolidations.

Dividend per share

Dividend per share consists of the total of cash dividends and stock dividends (as a proxy for cash dividends) declared in respect of the years under review.

Return on assets

Profit before interest and tax, divided by total assets, as defined above.

Return on equity

Net profit as defined above, expressed as a percentage of equity, as defined above.

Interest cover
Profit before interest, financial lease charges, tax and extraordinary items divided by the total of interest and financial lease charges paid.

Market capitalisation
The market value of all fully paid and issued ordinary shares calculated at the closing price of the last trading day of December 2009.


Financial statements not covering 12 months are annualised. If more than one financial period is reported in a calendar year the results are consolidated and then annualised.

 – Professor Leon Brummer, McGregor BFA


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