Clive Woolley - I replied to you last comment on the BAE (22nd sept) thread, albeit a bit belatedly, so I have copied my reply here:
Clive - looks correct to me and certainly the final figure is very much in the right area - I may sound vague here, but the TSS moves every day a little with the share price of course.
I use data which gives the net total assets from which I deduct the intangibles, same result your way so that is fine.
This is obviously a screening exercise and there are other factors that you must consider, often more subjective:
1. Look for anything odd in the balance sheet, things that don't quite stack up, TI Fluid systems for example, as discussed yesterday, the balance sheet and P&L look like they are from different businesses.
2. Watch out for a big debt or liability build up behind an apparently strong TSS - a variation on point 1. But also an absolute red flag.
3. Look at the ten year data, if you look at the ten year tangible equity build up for LGEN and BWY, it is a thing of great beauty like a marvelous piece of art, a balance sheet masterpiece.
4. There needs to be a continuity to the equity build up - that is why Aviva and M&G although reasonable buys I think, are not in the same league as LGEN, within their broad sector, due to the greater uncertainty of future earnings and equity build up for Aviva and M&G.
5. Sometimes when a business has undertaken a cash draining expansion, this can suppress the TSS and mask the opportunity. Forterra for example, with their new brick plant, to produce next year, Covid came as spend was peaking, they had to issue just over 6% shares as a precautionary measure last year and the development spend has obviously held back the divi. But even with the expansion impact, the TSS is still over 7%, so I don't use such circumstances to ignore the all important TSS metric, but I can make allowance under some circumstances if this metric is held back a little by sound expansion spend.
TSS Tangible shareholder surplus - the average annual growth in tangible balance sheet equity over the past 5 years, added to the forward yield. The sum is then expressed as a percentage of the current MCap after adjustments for the average annual share issuing or share buy backs over the previous 5 years.
The importance of the TSS is that the build up in tangible equity within the balance sheet is a far more accurate guide to actual retained profits than the declared earnings.
Nearly all the valuation metrics currently used such as PE, PEG, GARP and dividend cover are all based upon declared earnings which are often grossly exaggerated.
For example, investment publications or data sources talk about dividend cover. They refer to the alleged earnings left over once the dividend is paid, that is supposedly the dividend cover. Frequently though, despite a healthy earnings dividend cover being declared, the tangible equity shrinks year on year after the dividend has been paid, i.e. the so called retained earnings were not actually retained as tangible equity after the dividend was paid, which means that they never existed at all, otherwise the retained earnings would translate into tangible equity.
In a nutshell, earnings declarations allow businesses to be creative and to exaggerate. So called covered dividends are frequently not covered at all. Being able to understand and to calculate the Tangible Shareholder Surplus allows the investor to identify dividends that are fully covered, giving them a considerable long term edge over the wider market.
@Neil Gibbens my understanding from reading comments from @Bogdan Branislov is that TSS stands for Tangible Shareholder Surplus.
My understanding is that by comparing the current market capitalisation to the growth in tangible assets (less intangibles, plus dividends) it is possible to get an idea of how well the current price reflects the rate at which a business is adding shareholder value - over the medium term.
Fair value tends to give a TSS of around 5%, while a TSS of around 10% might suggest a buy opportunity.
A company like BATS which has borrowed heavily against future profits (transferring much of the risk of legislative changes halting operations to lenders) does badly on this assessment.
A company like LGEN currently provides a case study in what Bogdan is looking for, with a likely TSS of 9.5%. In a company with a market capitalisation of £ 17 Billion that means a TSS of 160 million per year.
I haven't convinced myself yet I can replicate the methodology, so I'm pleased Bogdan has just pre-empted my post!
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