Financial Indicator Interpretation (Updated)

【Answer 1】 Indicator Name Calculation Formula Meaning & Interpretation How to Assess / Reference Standards I. Per-Share Indicators Basic Earnings Per Share (EPS) Net profit attributable to parent company ÷ Total number of shares The most critical profitability metric—measures how much profit is generated per share Higher values are better; year-on-year growth matters more; e.g., Jiahua: 0.74, Luotuo: 0.71 Diluted EPS EPS assuming full conversion of all convertible bonds/options More conservative than basic EPS—guards against sudden share dilution from new issuances A large gap between diluted and basic EPS signals substantial potential share issuance. Book Value Per Share (BVPS) Total net assets ÷ Total number of shares The book value (“net worth”) attributable to each share P/B ratio = Stock price ÷ BVPS; P/B < 1 indicates “trading below book value”—stock price lower than book value. Operating Cash Flow Per Share Net operating cash flow ÷ Total number of shares Actual cash received per share—harder to manipulate than EPS Compare with EPS; persistently lower operating cash flow per share than EPS suggests low earnings quality. Retained Earnings Per Share Cumulative retained earnings ÷ Total number of shares How much the company has “saved up” for future dividends or reinvestment Higher values imply greater dividend potential; consistently high retained earnings without dividends may indicate lack of attractive investment opportunities. Reserve Per Share Capital reserve ÷ Total number of shares Primarily derived from share issuance premiums—can be used for share capitalization (bonus issues) High reserves suggest potential for “high bonus issue” schemes; cannot be used directly for cash dividends. II. Profitability Indicators Total Operating Revenue Sum of all operating revenues Measures the company’s “scale”—reflects business size and industry standing Assess growth via YoY/QoQ change; absolute value alone has limited meaning. Profit Before Tax Operating profit + Non-operating income/expenses (pre-tax) Earnings before tax deduction—after all costs and expenses Compare with net profit to gauge tax burden impact. Net Profit Attributable to Parent Company Net profit belonging to parent company shareholders The most critical profit figure—the source of shareholder returns Compare with non-recurring net profit to assess earnings quality. Non-Recurring Net Profit Net profit attributable to parent company − Non-recurring gains/losses Profit excluding one-off items such as asset sales, government subsidies, and investment gains More reflective of sustainable operations; if net profit is high but non-recurring net profit is low, earnings may be artificially inflated—key red-flag indicator. III. Profitability Metrics Return on Average Equity (ROE) Net profit ÷ Average net assets (average of beginning & ending balances) Warren Buffett’s favorite metric—measures how much profit shareholders earn per ¥100 invested >15%: Excellent; 10–15%: Good; 5–10%: Fair; <5%: Poor (red-flag threshold); using average net assets yields greater accuracy. Diluted ROE Net profit ÷ Ending net assets ROE calculated using ending net assets only—more conservative than average ROE If difference between the two is small, either suffices; a large difference implies significant intra-year changes in net assets. Gross Profit Margin (Revenue − Cost of Goods Sold) ÷ Revenue For every ¥100 of revenue, how much remains after direct production costs—reflects product competitiveness and pricing power Higher is better; e.g., Moutai >90%, steel sector 5–10%; inter-industry comparisons are meaningless—only intra-industry comparisons are valid.

Daily Financial Knowledge: Enterprise Value / EBIT—Mastering Capital Structure, the Cleanest Valuation Metric

【Answer 2】 The final valuation reflects *only* the underlying business itself—completely unaffected by capital structure or debt level. III. Two Core Advantages of EV/EBIT (Must-Know for All Investors) 1. Fully Eliminates the Impact of "Debt Levels" PE focuses solely on the profit ultimately accruing to shareholders. High debt and heavy interest expenses depress net profit, rendering PE valuations highly misleading. EV/EBIT ignores *who provides capital* (equity vs. debt) and focuses purely on the company’s core operational earning capacity. Whether the company operates entirely on equity or relies heavily on debt, EV/EBIT enables fair, apples-to-apples valuation comparisons. 2. Fully Eliminates the Impact of "Tax Rate Differences" Corporate income tax rates vary significantly across regions and industries—e.g., 15% vs. 25%. Such differences directly affect net profit and distort PE-based valuations. Since EBIT is pre-tax profit, it is entirely unaffected by taxes. Companies in the same industry—but operating under different tax regimes—can thus be fairly compared using EV/EBIT. In one sentence: PE is an “outcome-based valuation,” heavily distorted by financing choices and taxation; EV/EBIT is a “capability-based valuation,” reflecting only the company’s genuine, fundamental operating strength. IV. Practical Guide for Retail Investors: A Step-by-Step EV/EBIT Valuation Process No complex modeling required. Here’s a straightforward, actionable two-step process designed specifically for individual investors. Step 1: Identify Comparable Companies & Determine the Industry’s Reasonable EV/EBIT Multiple 1. Select publicly traded peers with similar business models, comparable scale, and operating in the same sector; 2. Calculate each peer’s EV: Market equity value + Debt value − Idle cash & non-core assets; 3. Extract each peer’s EBIT (Earnings Before Interest and Taxes) from its financial statements; 4. Compute EV/EBIT for each peer, then take the average or median—this becomes the industry’s reasonable valuation multiple. Step 2: Back-Calculate Target Company’s Intrinsic Value and Fair Share Price 1. Multiply the industry’s reasonable EV/EBIT multiple by the target company’s EBIT to derive its enterprise value (EV); 2. Derive equity value from EV: Equity Value = Enterprise Value (EV) + Cash & Non-Core Assets − Debt Value; 3. Divide equity value by total shares outstanding to arrive at the target company’s fair share price. In plain terms: First determine how many times “earnings power” the industry assigns to similar businesses; then apply that multiple to your target company—removing distortions from debt and taxes—to calculate its most realistic, fundamental fair price. V. Key Takeaways: When to Use EV/EBIT? 1. Primary Use Case: Prioritize EV/EBIT when comparing peers with markedly different debt levels or leverage structures—where PE becomes severely distorted. 2. Core Advantage: Unaffected by capital structure, debt magnitude, or tax-rate disparities—delivering fairer, cleaner valuations. 3. Fundamental Logic: PE measures ultimate shareholder returns; EV/EBIT measures the enterprise’s true, underlying operating profitability. 4. Practical Application: Enables peer-group comparisons while neutralizing debt and tax distortions—precisely assessing the real valuation of highly leveraged firms. Final Note: The greatest risk in investing isn’t failing to understand metrics—it’s applying the wrong metric and being misled by superficial data. PE works well for companies with stable, simple capital structures. EV/EBIT is the advanced, fairer valuation tool—specifically engineered to resolve valuation challenges for highly leveraged or structurally diverse firms—and serves as a core instrument for professional investors conducting deep stock selection and cross-company industry analysis.

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