Understanding the Strength score

Strength for capital markets

Can the business weather difficult times?

When sales slow down, the bills still arrive. The Strength score looks at debt, cash and profit to help you see how well a business is equipped to cope.

This guide covers businesses providing investment services.

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

Debt and running costs 35%A record of earning money 20%Handling income setbacks 15%Lasting profitability 15%Affording owner payments 15%

Strength for capital markets: 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?

0–29Very weak

30–49Weak

50–69Moderate

70–100Strong

70–100 means strong, 50–69 moderate, 30–49 weak, and 0–29 very weak. A good total can still come with a warning about a specific weakness.

02 / Explore the business

Questions behind the score

The percentages show how much each part counts.

Debt and running costs

How much funding is borrowed? How much income goes on running the business?

35%of the score

A simple example

$60 in running costs÷$100 income=60% used on costs

A smaller share leaves more room if income falls.

See how the points are calculated

In the calculation: Debt and ability to pay

▸Long-term borrowingWe compare long-term debt with the capital financing the business. If $40 of every $100 comes from long-term borrowing, the ratio is 40%. A smaller debt share gives the company more room when results weaken.Counts for 40% of this part of the score. Points: 0% gives 100 points; 70% gives 0.
▸Total debt in the financingWe compare all debt, both short-term and long-term, with total capital. This adds borrowing that the long-term-debt measure does not cover. A smaller debt share means less of the business is financed with money that must be repaid.Counts for 30% of this part of the score.
▸How much income goes on running the business?We divide operating costs by income. At 60%, running the business uses $60 of every $100 in income. A smaller share leaves more room if income falls. This measures cost efficiency, not how much cash is immediately available to pay debts.Counts for 30% of this part of the score. Points: 50% gives 100 points; 90% gives 0.

A record of earning money

How often were earnings positive after adjusting for unusual items? How deep were the falls?

20%of the score

A simple example

Positive earnings in6 of 8 years=75%

More years with positive earnings show a more consistent record.

See how the points are calculated

In the calculation: Profit and cash through difficult years

▸Years with positive adjusted earningsWe count the years when earnings adjusted for unusual items were positive. More profitable years show that the financial business has earned money more consistently. The size of earnings declines is assessed in the separate measure below.Counts for 60% of this part of the score.
▸Largest fall in adjusted earningsWe measure the largest decline from an earlier high to a later low in earnings adjusted for unusual items. A fall from 10 to 5 is 50%. Smaller falls show that earnings have held up better when conditions became more difficult.Counts for 40% of this part of the score.

Handling income setbacks

How deep was the largest fall in income per share?

15%of the score

A simple example

Income per share$100 → $70=30% fall

Smaller falls mean income per share has held up better.

See how the points are calculated

In the calculation: Sensitivity to downturns

▸Largest fall in sales per shareWe measure the largest fall from an earlier high to a later low in sales per share. A fall from $100 to $70 per share is 30%. Smaller falls show that income per share has held up better. Changes in activity and changes in share count can all affect this figure.Counts for 100% of this part of the score. Points: 10% gives 100 points; 80% gives 0.

Lasting profitability

Do returns exceed borrowing costs? Is the share of income kept as profit improving?

15%of the score

A simple example

12% return−4% borrowing cost=8 percentage points

This compares the business’s return with borrowing costs. It does not include the return shareholders require.

See how the points are calculated

In the calculation: Lasting profitability

▸Return compared with borrowing costWe compare the return earned in the business with its estimated borrowing cost after tax. A return of 12% and a borrowing cost of 4% leave a gap of 8 percentage points. A larger gap is stronger here. We average the yearly gaps to avoid relying on just one year; this comparison does not include the return shareholders require. For this company type we use return on capital employed (ROCE): operating profit compared with the capital used by the business.Counts for 66.67% of this part of the score. Points: 0 percentage points gives 0 points; 8 percentage points gives 100.
▸Is profitability improving or weakening?We examine how the company's profit margin has changed over several years. A margin shows how much of its income becomes profit. A rise from 10% to 12% means $2 more of every $100 in income is left as profit. A rising margin strengthens this part of the score; a falling one weakens it.Counts for 33.33% of this part of the score. Points: −2 percentage points per year gives 0 points; +2 percentage points per year gives 100.

Affording owner payments

How much profit is paid as dividends, the payments to owners?

15%of the score

A simple example

$4 paid to owners÷$10 profit=40% paid out

Paying out a smaller share of profit leaves more room if earnings fall.

See how the points are calculated

In the calculation: Ability to support the dividend

▸How much of the profit is paid out?We compare dividends with profit from the same period. If profit is $10 per share and the dividend is $4, the company pays out 40% of its profit. A smaller payout share leaves more room to keep paying if earnings fall.Counts for 100% of this part of the score. Points: Up to 40% payout gives 100 points; 60% gives 80; 80% gives 40; 100% or more gives 0.

The percentages assume the company pays dividends. Dividends are payments to owners. If it pays none, we leave out that part and share the score between the other four parts in the same proportions.

Confidence is always Limited for this method because some important risks are not covered by the available data.

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. Enough information about debt and payment capacity is also required.

03 / Look a little closer

How we calculate the points

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

How the checks add up

Financial services and capital markets

For businesses such as asset managers and brokers, we examine debt, earnings, costs and sales per share. The efficiency ratio shows how much of income is used by operating costs. Lower costs relative to income leave more room when business weakens.

Debt measures receive 70% of the debt part and efficiency 30%. The latter adds operating flexibility; it is not a direct measure of cash available to pay bills. Earnings history and sales declines are assessed in separate parts.

We use ROCE, profit compared with capital employed, for the return check. Confidence is Limited because the available data does not cover every important risk specific to these financial businesses.

Which years do we look at?

To see how the business handled difficult years, we look back over up to eight full financial years. For lasting profitability, we use up to five. Most historical checks need at least three usable years. With only three or four, confidence is Limited.

For current debt and dividend checks, we use the latest 12 months, often called TTM. If those figures are missing, we use the latest full financial year. A ratio always compares figures from the same period.

We do not count a rolling 12-month total as an extra financial year. We also do not pull in older years to fill gaps. The cards show the periods used.

How much information supports the score?

Data coverage tells you how much of the planned calculation we can support with usable figures, taking each measure's share into account.

High: at least 90% coverage. Good: at least 70%. Limited: at least 60%. We also need at least 60% of the debt part to be measured. Without that debt information, or below 60% overall coverage, we show no score.

Short histories of three or four years, certain substitute measures, and the insurance and financial-services methods limit confidence to Limited. The label describes the information supporting the score, not a guarantee about the future.