Understanding Business Momentum

Business Momentum for most companies

Is the business getting better or worse?

A strong business can still have a difficult year. Business Momentum looks at recent results and changing expectations to show which way the business is moving.

This guide applies to most businesses, including shops, manufacturers and software companies.

7 parts. One score from 0 to 100.
The score describes the business. It does not tell you whether the shares are cheap.

Income per share 15%Profit per share 25%Generating more cash 20%Improving profitability 20%Number of shares 5%Changes in expectations 10%Results versus expectations 5%

Business Momentum for most companies: illustrated explanation; the same checks are explained below. — Open the full-size image in a new tab.

01 / Read the result

What does the number tell you?

0–39Weakening

40–59Mixed

60–100Improving

The score runs from 0 to 100. 60–100 means improving, 40–59 means mixed, and 0–39 means weakening. This describes changes in the business.

02 / Explore the business

Questions behind the score

The percentages show how much each part counts.

Income per share

Is income growing for each share?

15%of the score

A simple example

Income per share$10 → $11=10% growth

Using an amount per share allows for changes in the number of shares.

See how the points are calculated

▸Sales per share: a fall of 10% gives 0 points; a rise of 10% gives 100.

Profit per share

Is the business earning more profit for each share?

25%of the score

A simple example

Profit per share$2 → $2.20=10% growth

More profit reaches each share in this example.

See how the points are calculated

▸Profit or FFO per share: a fall of 20% gives 0 points; a rise of 20% gives 100.

Generating more cash

Is more of each sale left as cash after running and investing in the business?

20%of the score

A simple example

Cash left from each $100 of sales$10 → $15

The free cash flow margin has risen from 10% to 15%: an improvement of 5 percentage points.

See how the points are calculated

▸Cash from operations per share: a fall of 20% gives 0 points; a rise of 20% gives 100.
▸Free cash flow as a share of sales: a fall of 5 percentage points gives 0 points; a rise of 5 gives 100.

Improving profitability

10%: Is more income kept as profit? 10%: Is the return on money used in the business improving?

20%of the score

A simple example

Of every $100 in income$10 → $12left as profit

More profit from the same income means the profit margin has improved.

See how the points are calculated

▸Profit margin and return on capital: a fall of 5 percentage points gives 0 points; a rise of 5 gives 100.

Number of shares

Are there fewer or more shares? Fewer shares earn more points here.

5%of the score

A simple example

Number of shares100 million → 97 million=3% fewer

Fewer shares earn more points in this check. These are share counts, not dollar amounts.

See how the points are calculated

▸Number of shares: a rise of 5% gives 0 points; a fall of 3% gives 100.

Changes in expectations

Have experts raised or lowered their forecasts for future profit?

10%of the score

A simple example

Expected profit per share$2 → $2.20=10% higher

Analysts have raised their forecast. The company has not yet reported this profit.

See how the points are calculated

▸Analyst profit forecasts: a reduction of 20% gives 0 points; an increase of 20% gives 100.

Results versus expectations

Was the latest profit above or below the experts’ forecast?

5%of the score

A simple example

$2 expected→$2.20 reported per share=10% above forecast

This compares the reported result with what analysts expected.

See how the points are calculated

▸Reported profit versus the forecast: 30% below gives 0 points; 30% above gives 100.

We compare reports with the same periods a year earlier. The newest comparison counts 70%; the preceding one counts 30%. If only one is available, we use it and show that less information supports the score. For the number of shares, we must be able to compare the latest report with the same period a year earlier. If that comparison is unavailable, this part is not scored from older reports.

Missing figures reduce the information supporting the score and may change how much each remaining check counts. With too little usable information, no score is shown. Read the notes beside the company’s score.

03 / Look a little closer

How we calculate the points

Explore the calculation, the periods used and the information behind the result.

Which reports do we compare?

We compare each recent report with the corresponding period of the previous financial year. For example, a company's first half is compared with its first half a year earlier. This helps avoid confusing seasonal changes with progress.

The newest comparison counts 70%. The comparison for the preceding reporting period counts 30%. Recent results therefore matter most, while the preceding report still contributes.

If only one comparison is available, we use it and show that less information supports the score. We do not replace a missing recent report with an older one. If only annual reporting can be used, we compare the latest full year with the year before, and that year with the preceding year. We do not use rolling 12-month totals. For the number of shares, we must be able to compare the latest report with the same period a year earlier. If that comparison is unavailable, this part is not scored from older reports.

How changes become points

An unchanged result normally gives 50 points. Improvement gives more points and deterioration fewer, on a scale from 0 to 100. Between the values below, the points change gradually.

Changes in margins and returns are measured in percentage points. For example, a margin rising from 10% to 12% has improved by 2 percentage points. That is different from a 2% rise in sales.

For earnings and cash amounts, a smaller loss counts as improvement. Moving from a loss to a profit gives 100 points, and moving from profit to loss gives 0. Starting from zero, a positive result gives 100, a negative result 0, and another zero 50. For other changes, we divide the difference by the size of the earlier amount, ignoring its minus sign.

We set aside impossible inputs, such as negative sales or a share count of zero. They do not earn points.

How we use analyst expectations

We follow the forecast for the first financial year after the latest completed year. We compare the latest forecast with one recorded 90 to 120 days earlier. The latest forecast must be no more than 45 days old and come from at least one analyst.

We normally use profit per share adjusted for unusual items, called normalized EPS. If it is unavailable, we use the unadjusted EPS forecast for the same year. We use one of these measures, not an average of both. For REITs, we use FFO per share.

A forecast based on few analysts has less influence. With one analyst, a result that would otherwise give 100 points becomes 60. With five or more analysts, it keeps all 100. The same adjustment pulls low scores towards 50. The calculation is: 50 + (points before adjustment − 50) × the smaller of analyst count ÷ 5 and 1.

For results versus expectations, we compare reported profit with the analysts' average forecast for that exact reporting period. We use normalized EPS, or FFO for REITs. If the latest reporting period cannot be compared, we try the latest full financial year. An estimate never replaces a missing reported result.

How much information supports the score?

A part can contribute to the score when at least one of its two report comparisons is available. Both comparisons provide full coverage; the newest alone provides 70%, and the earlier alone 30%. Coverage means how much of the planned calculation we can support with data, taking each part's share into account.

High confidence requires at least 90% coverage, Medium at least 70%, and Low at least 60%. Below 60%, we do not show a score. Parts that do not apply to the company type are left out of this calculation too.

For banks, using net interest income divided by assets in place of the reported net interest margin limits confidence to Low. Other permitted alternatives do not automatically lower this label further. Notes explain missing information and substitutions. Business Momentum does not add separate warning badges.