RSA Insurance Group plc (RSA.L): Shareholder Yield of -0.043956 Suggests Potential Skittish Moves Ahead

Shareholder yield has gained increased attention in recent months as a key valuation metric. The measure compares the cash flow a firm is “returning to shareholders” to a stock’s market value. Shareholder yield is similar to the price-to-free cash flow ratio or enterprise value-to-EBITDA. Like those more traditional measures, shareholder yield attempts to show the relationship between cash generated by an investment and the cost of that investment. RSA Insurance Group plc (RSA.L)’s currently has a shareholder yield of -0.043956.

There are plenty of technical indicators that traders can choose to follow. With so many different signals to follow, traders may choose to focus on a small number of indicators to start. Many technical analysts will use a combination of different signals in order to help identify the best entry and exit points of a trade. Becoming a master at spotting trends and creating charts may seem impossible for the novice investor. Taking the time to fully understand the methods behind the indicators may help the trader with trying to sort everything out. Studying up on the theory behind some of the more popular indicators may help the trader understand exactly what they are doing when setting up their charts.       

Price to Sales

In the original edition of ‘What works on Wall Street’, O’Shaughnessy wrote that the single-best value factor was a company’s price-to-sales ratio (P/S). In his latest edition the P/S continues to perform well, but it was unseated by the value composites and EBITDA/EV due to 2 reasons: (1) A broader scope of analysis by using deciles and (2) two very bad years for P/S, e.g. 2007 and 2008. A stock’s P/S is similar to its P/E ratio, but it measures the price of the company against its annual sales instead of earnings.

It’s calculated as follows:

Price-to-Sales Ratio = Market Cap/Net Sales or Revenues

RSA Insurance Group plc (RSA.L) has a price to sales ratio of 0.867319.

Total Asset Growth

In their 2008 paper, professors Cooper, Gulen and Schill provided evidence that a firm’s assets growth rates are strong predictors of future abnormal returns.

“The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spin-offs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns.” – Cooper, Gulen & Shill in Asset Growth and the Cross-Section of Stock Returns. In a study on US data during the period 1967-2007, they find that:

– A hedge portfolio rebalanced annually that is long (short) the stocks of companies with the lowest (highest) percentage growth in total assets over the previous 12 months generates an average annual return of 22%.
– This asset growth effect is stronger for small capitalization stocks, but is still substantial for large capitalization stocks.
– The effect is strongest in the month of January.
– Asset growth rate retains large explanatory power for future stock returns after accounting for firm size, book-to-market ratio and momentum. In fact the asset growth effect is at least as powerful in explaining returns as these other widely used factors.

We calculate asset growth as follows:

Total Asset Growth = (Total AssetsTotal Assets y-1) − 1. RSA Insurance Group plc (RSA.L) has a total asset growth number of 0.011754.

External Financing Ratio

This factor was introduced by Richard Tortoriello, a senior quantitative analyist for S&P Capital IQ. He authored a book on quantitative analysis: Quantitative Strategies for Achieving Alpha (2009, McGraw Hill). In this book, he identified the External Financing Ratio as a factor that is very good at predicting investment underperformance.

Formula:

External finance ratio = (Total Assets−Total Assets y-1−Cash Flow from Operations) / Total Assets

RSA Insurance Group plc (RSA.L) has an external finance ratio of -0.001625.

Cash Flow on Capex

Another ratio S&P Analyst Richard Tortoriello recommends to use is ‘Operating Cash Flow to capital expenditure’. (‘Quantitative Strategies for Achieving Alpha’) This ratio is used by analysts to determine a company’s ability to fund operations. It helps to get a better understanding of whether a company is able to buy more assets without having to issue debt or equity.

A rising cash flow to capital expenditures ratio might indicate that the company is in a position to grow.

Please note that some industries are more capital intensive than others, which should be taken into account when evaluating companies.

Formula:

Cash flow on Capex = Cash Flow from Operations / Capital Expenditure

The Cash Flow on Capex for RSA Insurance Group plc (RSA.L) is 18.466667.

ERP5
The ERP5 Rank is an investment tool that analysts use to discover undervalued companies.  The ERP5 looks at the Price to Book ratio, Earnings Yield, ROIC and 5 year average ROIC.  The ERP5 of RSA Insurance Group plc (RSA.L) is 1629.  The lower the ERP5 rank, the more undervalued a company is thought to be.   The Piotroski F-Score is a scoring system between 1-9 that determines a firm’s financial strength.  The score helps determine if a company’s stock is valuable or not.  The Piotroski F-Score of RSA Insurance Group plc (RSA.L) is 5.  A score of nine indicates a high value stock, while a score of one indicates a low value stock.  The score is calculated by the return on assets (ROA), Cash flow return on assets (CFROA), change in return of assets, and quality of earnings.  It is also calculated by a change in gearing or leverage, liquidity, and change in shares in issue.  The score is also determined by change in gross margin and change in asset turnover.

Investors hope that they won’t have to deal with stock picks that don’t pan out, but this happens quite often in the stock market. At some point, the investor may have to make the tough decision to sell a stock that previously had a lot of upward potential. Holding onto an underperforming stock can sometimes hurt the portfolio. Investors may be hesitant to let go of the stock long after it should have been sold. Tracking the underlying fundamentals can assist the investor with figuring out the proper time to buy or sell a particular stock. Mastering this aspect of investing may come with experience, but it may be highly beneficial for the long-term success of the portfolio.

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