Not applicable criteria: banks, insurers and real estate companies

What the “Not applicable” box does

Each criterion on a sheet has a “Not applicable” box. When ticked, it takes the criterion out of the score and the progress: it counts neither as green nor as red, and the sheet can be complete without it. The dashboard shows it with a dot of its own.

It is meant for when the indicator makes no sense for the company, not when the figure is simply hard to find or disappointing. A poor criterion stays red.

Why some sectors are a problem

The preset strategies are designed for industrial, commercial or service companies, whose accounts clearly separate the business from how it is financed. Three families of companies fit them poorly.

Banks

For a bank, debt is the raw material: it borrows (deposits, markets) in order to lend. Its income statement shows neither cost of sales nor a comparable operating profit, and its balance sheet does not separate current and non-current items. Not applicable: gross margin, operating margin, net debt / EBITDA, current ratio, EV / EBIT, ROIC, and anything based on FCF.

Insurers

An insurer collects premiums before paying claims, sometimes years later. Its cash flows mix the business with its investments. The same criteria as for a bank are not applicable.

Real estate companies

A real estate company owns buildings that it rents out. Depreciation of the buildings reduces its accounting profit with no cash going out, and its debt is backed by its assets. The P/E and the payout ratio calculated on earnings make it look more expensive and more generous than it is. Net debt / EBITDA is structurally high there.

An example

You fill in a sheet with the Value preset strategy for a fictitious bank, called Bank A here. You enter the P/E, the price / book value, their product and the margin of safety. You tick “Not applicable” on EV / EBIT, FCF yield, the current ratio, net debt / EBITDA and the financial strength score. The score is calculated on the remaining criteria. It is useful, but it rests on fewer criteria: keep that in mind when comparing it with an industrial company’s score.

Better: a strategy suited to the sector

If you follow several banks or real estate companies, create a dedicated strategy rather than ticking the same boxes on every sheet. Duplicate a preset strategy, remove the unsuitable criteria from your copy and add those of the sector:

• Banks and insurers: return on equity (ROE), price to book, the solvency ratio published in the annual report, and the payout ratio.
• Real estate companies: the share price against net asset value, debt against the value of the properties, the occupancy rate, and a payout measured on operating cash flow.

The tutorial customize a preset strategy explains the steps.