I have had a few queries over the last while from clients about what stock/ share I like for the short term. This is a very hard question and often as a financial advisor you tend to avoid stock picking and concentrate on more diverse investment strategies incorporating a variety of different asset classes to ensure the clients’ money is relatively secure and in a position to make achievable returns.

I know as an investor we can in some certain circumstances be instantly confused when we receive information about a particular company all we have to is have a look at the financial statements and we are presented with a variety of jargon ( DPS, adj EPS, NAV, EBITDAe, ROE, PE, Price/NAV) that to a lot of us means nothing.

The purpose of this blog is to present 5 of the most important figures that I look at as an investor and hopefully it will give you a starting point going forward when trying to dissect value or logic from a company’s financial statement.

1.      Gross Dividend Yield

This is the gross annual dividend, divided by the current share price. Typically shares that produce a very low dividend yield figure are referred to as growth shares as a significant return is expected to come from growth in the share price itself.

Alternatively shares which offer a higher dividend yield coupled with a lower level of earnings growth as referred to as value shares as they offer attractive dividends with a relatively low growth in share price value.

2.       Dividend Cover

If you are an investor that focuses on shares that pay dividends then this is an extremely important figure that you should keep an eye on. Dividend cover is a measure of the financial ability of a particular company to continue to pay out the current level of its dividend.

Obviously the higher the level of dividend cover the better as the company has the ability to maintain and potentially increase dividend compared with a company which has a lower dividend cover. In comparison we would usually expect growth stocks to have a higher level of dividend cover than value stocks, as growth stocks would typically be paying out a much lower proportion of their profits in dividends than value stocks.

3.       P/E Ratio (PER)

This is probably the most talked about piece of information when we hear earnings reports from companies. Without getting bogged down in the calculations of the PER let us imagine that when you buy a particular stock you are in fact buying the right to a flow of future earnings, and the figure represents the number of years it will take to recover the investment made in buying the share.

A high PER relative to the market indicates that the investment market expect that companies future earnings to grow at a faster rate than the overall market. On the other hand a low PER relative to the market indicates that the investment markets expect that a company’s future earnings to grow at a slower rate than the overall market.

4.       Net Asset Value (NAV)

The Net Asset Value of a share represents the share of the company’s assets, less its loans and amount owed, for each individual share. For me this is probably one of the most important figures for assessing the security of an investment as it represents the estimated value a share would be entitled to if the company were wound up, and all its assets sold and debts repaid.

You might expect that a share price should never ever fall below its NAV, as at that value the company is effectively being valued at its break-up value, and takes no account of its ability and track record to earn profits from these assets. However it does happen and it can be a good opportunity to find value in companies.

5.       EBITDA

This is often the one that scares individual investors unless they are familiar with accounting. The term EBITDA refers to a company’s earnings before:

Interest (payable by the company on loan stock and bank borrowings)

Taxes (payable by the company)

Deprecation (of fixed assets)

Amortisation (i.e. writing off goodwill in accounts, etc.)

In simple terms it is often used to describe earnings before all the nasty bits! It is a very good method of calculating and comparing profitability between companies and industries because it eliminates the effects of a company’s particular financing and accounting decisions.