Category: Investing wisdom

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 RatioCF = NI-CFO-CFI / Average NOA

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

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

Excel -1

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

Excel -2

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

How to Time markets ?

Before you pull out the gun and knock my head off even for suggesting to time market, let me tell one such experience where discipline and patience has helped me to time market

Lets begin – Cicra Feb 2011
I had accumulated decent savings in short term debt funds and hence I started to look for opportunities in stock market, My strategy was to look where the smart money is investing in small and mid cap space, so I started digging holdings of successful mutual funds , funds which had given more than 18% CAGR return for last 5 years
Quite a few funds were shortlisted, next I sorted these funds with least expense ratio and then chose five funds in order of highest 5 year CAGR returns.
The subsequent exercise was to determine stocks owned by these funds, a minimum of two funds should own a company to make it to final evaluation list, you can read this method in a detailed post I did some time ago
Final list looked liked this

IPCA-1

Do I under all of the above business?

Obviously no so chemical companies – Bayer, Tata Chemichals, Zuari,UPL were first shown the door followed by Mining … Read the rest

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Paying for growth – Symphony

We did post on Symphony in April taking a leap of faith by paying for growth and adding it to then our public portfolio. This is going to be a very short post as we examine how valuation changes in high growth companies

 

Flash back April 2014 – Symphony per share valuation on 2013 reported numbers

paying for growthOur logic to add Symphony to model porfolio was simple , Sustainable growth basis per share value was calculated at 843 as per 2013 reported numbers (Note Symphony reports June to June FY) which was well below market price that time giving us an adequate margin of safety if company kept growing

Now lets come back to Symphony per share valaution based on 2014 reported numbers

 

paying for growth

Now pay close attention to per share instrnic value a whopping 50+% increase in sustainable earnings per share value, followed by  a very close 47%+ increase in instrnic value per share on FCF basis
However, if you are shopping it for the long haul, not here-today-gone-tomorrow, so you can help your daughter or son overcomes an ED. viagra spain It’s popularity has not cialis generika decreased, but it’s often expensive and not covered by some … Read the rest

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Imitation is the sincerest form of flattery

Recently got a chance to read this insightful paper – Imitation is the sincerest form of flattery : Warren Buffet and Berkshire Hathaway

imi-1

What really interested me was this conclusion

“The market appears to under-react to the news of a Berkshire Hathaway stock investment since a hypothetical portfolio that mimics the investments at the beginning of the following month after they are publicly disclosed also earns significantly positive abnormal returns of 10.75% over the S&P 500 Index”

After reading this I was reminded of this advice by Mohnish Parbai

“Be a cloner… but clone the best”

I wanted to try this cloning exercise with an Indian investor, Unfortunately we don’t have a Warren Buffet in India. So I zeroed in on Radhakrishna Damani (RK) a respected value investor. As of March 31 , 2014 these were his key public holdings

3M India, Gati, Sterling Holiday Resorts, Sundaraman Finance, TV18 Broadcast, VST Industries

Back testing of cloning RK portfolio , this was our simple method

  • Hypothetically buy an investments one year after RK has bought to overcome any hangover effect of his entry in stock, therefore GATI can’t make the cut as it was brought by RK in December 2013
  • Get

… Read the rest

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Don’t Trust Scary promises

“When one with honeyed words but evil mind
Persuades the mob, great woes befall the state.”
― Euripides

 
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Glossy stock predictions always makes me uncomfortable, but more than that are the false promises made by analysts. Download below to read two recent such scary ones. As I always say buyers be aware 🙂

 Scary Promises

Image source

… Read the rest

How high dividend pay-out sets the floor for stock price

How can high dividend payment set the floor price for stock? Let’s look through an example

Noida toll bridge Company – The Noida Toll Bridge Company Ltd (NTBCL) has been promoted by Infrastructure Leasing and Financial Services Ltd (IL & FS) and New Okhla Industrial Development Authority (NOIDA), as a special purpose vehicle (SPV) to develop, construct, operate and maintain the DND Flyway on a Build Own Operate Transfer (BOOT) basis.

What is special about this company – Being a toll bridge company operating just one toll bridge there is no capex requirements for the company, apart from regular repairs and maintenance and finance charges the balance proceeds in theory should be paid out as dividend. The company was not able to pay dividend till FY10 as it was having high debt on its books and was referred to corporate debt restructuring scheme but from FY 11 it has started paying dividends, the pay out in FY14 was more than 70% look at the chart below

Noida - 1

Source: icicidirect.com

As you can see the dividend has been steadily rising from FY 11 onwards.

Now if you are an average investor what is risk free return that you can earn today? Assuming … Read the rest

Beware of glossy stock predictions

Here it one such glossy stock prediction coming from a guy who has cult following on internet and whose recommendation have hit upper circuits after mentions on his blog

Company

AG-1

Now let us dissect the recommendation

Ag-2

Generic statements, a promise that Mr.Modi’s new government can be a game changer for sector, good to know that the market opportunity / scale is huge

Ag-3

There could be valid reasons why Asian Granito has always traded below par to above companies but this not explored. Well the real reason is Asian Granito has been reporting consistent decline in earnings compared to above companies which have been doing fantastically well, but that doesn’t fit into story so the author chooses to ignore this, Have a look at profits in below chart

ag-4ag-5

Trading at less than 10 PE , not able to find reason ???  the reason is very simple even if someone had bothered to look at even basic figure of net profits for Kajaria and compared that with Asian, Here it is for your reference

ag-6

Turnover has increased for both companies, however one look at net profit and you will know why share price of Kajaria has flourished and Asian Granito has declined… Read the rest

Avoid investing in business with poor economics

MNG - 0

  Economics matter – Manugraph

  India

 

 

 

“When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” – Warren buffet

A company with clean and transparent management running a business with bad economics is a bad investment choice. In today’s post we will try to explain this with example of Manugraph India

About Company

Established in the year 1972 by its founder Mr. S. M. Shah, Manugraph India Ltd is India’s largest manufacturer of web offset presses. In India, Manugraph ranks as Numero Uno in the manufacture of web offset presses. With a whopping 70% market share and quality presses ranging in speeds from 35,000 – 70,000 copies per hour, Manugraph presses are present in nearly all major publication houses. For more details visit their website here

Our Method – Inferring management communication to share holders via annual reports

Here goes our analysis of annual reports and persistent economic problems articlated by management

– Inability to pass rise in cost to customers

– Inability to control wage / employee benefit cost

36th Annual report (2007-08)

Read the  Management discussion and Analysis … Read the rest

Is predicting winners in stock markets possible ?

In our last few posts we have discussed about India’s fastest and most consistent wealth creators in last decade. In today’s post we back test stock predictions made by Motilal Oswal annual wealth studies.

I have picked years  2006 -10 for our analysis so that we can have at least 3 years of stock performance data available for latest predictions. In addition to this for the sake of consistency I have kept Nifty and CNX Nifty midcap as a benchmark indexes to compare performances for all stock predictions.  Each year the studies had a value investing theme simplified into a mathematical model to identify prospective investments. Lets look at those predictions and how have they fared over years.

 2006 – The value investing theme was favorable terms of trade, the study states that a company enjoys favourable ”terms of trade” if its debtors are lower than its creditors. So favorable terms of trade could result in zero or even negative working capital. Whereas adverse terms of trade could mean very high working capital requirements, making the business unprofitable.

The above explanation was converted into a mathematical model and three stocks were identified with favorable terms of trade- HPCL, … Read the rest