Turnovers vanity profit is sanity!
These were the words of one of my clients who was an extremely successful businessman told me, and whilst he departed this World some years ago it is a phrase that I have never forgotten.
Whilst this statement undoubtedly holds true I still like to look at whats been going on when it comes to revenue for potential investments that I like the look of (I know I consistently refer back to it but an insight into overpaying for revenue is provided by Scot McNealy in an interview with Bloomberg); the important factor is that revenue doesn’t get manipulated or adjusted in the same was the bottom line EPS – assess revenue properly and it can help you find anomalies that will keep you safe or present you with an opportunity.
After reading an interesting article at Advisor Perspectives about comparing market cap to revenue weightings, I thought I might do the same with the FTSE-100 and see what it told me……
It turns out that this was a pretty useful exercise in where it would have been appropriate to adjust some of the allocation weightings within your portfolio; first a look at the FTSE-100 five years ago in 2011. I have added data points for two interesting sectors, Mining and also Travel & Leisure for different reasons: –
- Mining shares Market Capitalisation made up 16.75% of the FTSE-100 yet their revenue was only 7.22% of the total from FTSE-100 firms
- In contrast the Travel & Leisure Sector made up only 3.06% of the FTSE-100 by Market Capitalisation despite enjoying 9.28% of total revenues
Things would change dramatically for both these sectors over the next five years….fast forward to 2016 and take a look!
Looking first at the Mining Sector where revenues have remained fairly constant at around 7% of all revenues from FTSE-100 companies; however in 2011 investors were clearly overpaying for these revenues as the market capitalisation topped 16% of the FTSE-100; the result a loss in value for the Mining Sector of 63.7% and a serious destruction of value.
With regards revenues for the Travel & Leisure Sector these again have remained fairly constant at just over 9% but the market capitalisation for the sector now makes up 5.31% of the FTSE-100 with the sector index adding just over 72% in the last five years.
It would seem that revenue is important but it may now be that for large multi-national firms Market Capitalisation is vanity!