Month: February 2015

February 20, 2015

How accountants can trick quality of earnings

Quality of earnings is very difficult to assess as swindlers have so many tricks up their sleeve,One of techniques that I personally use to separate good from odinary business is by using Earnings Power Box, I have done a detailed post on it you can read it here

This post is an extension to that post equipping retail investors to assess quality of earnings.

There are two simple ratios using accruals not often reported or put on financial websites but they do explain the state of quality of earnings, they are calculated by using two different approaches

Balance sheet approach

Calculate Accruals which is difference between beginning and ending NOA (Net operating assets)

Here, NOA = Net operating assets = {(Total assets – cash and equivalents and investments) – (Total liabilities – Total debt)}

Accruals _BS = NOA _END – NOA _BEG

The Accruals ratio is = Accruals _BS / Average NOA

Lower the ratio, better the earnings of the company (Remember this)

The second approach is Cash flow approach

Accruals _CF = Net Income – Cash Flow Operations – Cash Flow from Investing

Accruals Ratio_CF = NI-CFO-CFI / Average NOA

Again, lower the ratio, better the earnings … Read the rest

February 17, 2015

Trend Investing – Second Take

On 25^th may 2014 we wrote about how traders can ride the Modi momentum in large cap companies, we created a management and momentum box, read the old post here

After 9 months, let’s look at some of the interesting data, all the quadrant has been labelled as Q1,Q2,Q3 & Q4 as per below for ease of understanding

This is the average returns made by all four quadrant

We wrote in May ,

“The underlying theory is simple good companies with capable management will be able to leverage the modified environment to their advantage much faster than good companies with shallow management “

It did came out true as well with Q2 having highest return to date, both Q3 and Q4 on an average were not able to beat return to date market (Sensex) returns

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February 14, 2015

How using only excel as a tool to invest can make you really poor !

The operative word here is only , I have seen far too many causalities where the projected numbers have looked fantastic and people invested without bothering to understand business and the story have had miserable returns

What to do when you are really optimistic about future of the company want your customers to buy ?

Take out an excel and start to put fancy projections, numbers never lie and when given an ascending pat they present a rosy picture to gullible investors

Don’t believe me ?

See the below extract from a brokerage report on Phoenix Lamps, obviously the brokerage house was gung-ho about sales projections and profit projections.

Excel work

Actual results were not as rosy as excel and the stock predictably nosedived

As an investor how can you avoid it ?

Should you stop using any tool for financial projections ? I would not recommend that but use excel or for that matter any tool as an aid and not as decision maker.

Make investing process a little simple, write these simple questions and answer them in writing before making any long term investment

What does the company do and how it creates value (earns money) ?
What

… Read the rest