Profit, provision, ROTE... Companies’ financial reports contain a large number of terms to describe how their business is performing. While we are familiar with some of these concepts, others are more complex. Here is a list of the terms most commonly used and what they mean.
All companies with shares listed on a regulated market, e.g. the stock exchange in Spain or another European Union country, are required to report their financial results on a regular basis (normally every three or six months). They each issue a report in which they provide detailed information for the public on the performance of their business. This includes revenues, costs and profitability, and the methods used for producing these figures. This information is useful for shareholders and investors in order to monitor the performance of their investments. Here is an explanation of the most important terms.
Profit: the amount obtained by the company from its economic activity in the tax year. It is calculated by adding up all revenues and then subtracting all costs, including operating expenses, loan-loss provisions, etc. In other words, it is the amount of money left over after deducting all expenses and taxes.
Attributable profit: the part of the profit that is directly attributable to the parent company, based on its percentage ownership of the various companies it owns.
EPS: this means “earnings per share”, a term commonly used by investors, meaning the part of the profit (or “earnings”) relating to each share. It is used to measure performance and is calculated by dividing the company’s profit by the total number of its shares.
DPS: this is “dividend per share”, meaning the amount of net profit that the company distributes in dividends to its shareholders. It is calculated by dividing the company’s attributable profit by the number of available shares.
Provision: the funds set aside to cover, if needed, possible losses on assets (e.g. unpaid credit) and any obligations that may arise as a result of lawsuits, etc.
TNAV: this is “tangible net asset value”. It is widely used for measuring the book value of a company’s shares, after deducting intangible assets. It is useful for assessing the amount that each shareholder would receive if the company went into liquidation and its tangible assets were sold. TNAV is calculated by dividing tangible assets (Equity minus Intangible Assets) by the number of shares (after deducting treasury shares).
CET1 ratio: expressed as a percentage, this is used in the financial sector to measure how much capital a bank has (its economic solvency) in proportion to its risk-weighted assets. It stands for “common equity tier 1”. It is made up of shares, capital reserves and other items. It is used for ensuring that banks have sufficient capital to meet unforeseen losses relating to the risks in their portfolio. In other words, it is the ratio for measuring a bank’s financial health.
Cost-to-income ratio: this is used for calculating a company’s productivity and is expressed as a percentage. It measures the amount of funds used to generate operating income. For example, if a company needs to spend €45 to generate €100 of income, its cost-to-income ratio is 45%.
ROTE: this is “return on tangible equity”. Simply put, this measures the amount of return a company obtains from its tangible equity.
ROE: this refers to “return on equity”. This measures the return on the funds invested in a company, i.e. the company’s ability to remunerate its shareholders. It is calculated by dividing profit by equity.
Payout: the percentage of profit allocated to paying dividends. It demonstrates how much the company pays its shareholders as a result of its dividend policy (dividends divided by net profit).