Tag: earnings power

Catching the falling knife – Eros International

Recently Eros media international has been in news although not for good reasons 🙂 Eros which is also listed in NYSE was downgraded by Wells Fargo ,a leading banking and financial services company.

See in this succinct note from the newspaper cut

Wells Fargo analyst Eric Katz had said the downgrade was driven by a continued increase in receivables in the United Arab Emirates business, concerns on whether Eros would turn free-cash-flow positive, and worries about Eros Now.

The management countered such claims

We would like to reassure our shareholders that there has been no material change to the previously announced strong fundamentals of the company.

The first quarter results have been strong and nothing has materially changed since then, the company said.

We will be announcing what we expect to be a strong second quarter in the first half of November,it added.

We reaffirm our commitment to enhance shareholder value.

We believe that the merit in our business and our fundamentals are there for everyone to see as we remain focused on achieving our business goals and objectives

also most of other brokerage houses that cover company continue to maintain their buy rating

My only exposure to Eros has … Read the rest

Use earnings framework to find great business

One quote is copy pasted on my desktop as a sticky note and I read it every time I look at new investment opportunity

What to look for in a great business?

A high return on capital (not contributed by a very low margin operation where margins could fall) which is sustainable – pricing power, low cost advantage etc. Ability to deploy incremental capital at high rates of returns i.e. growth prospects. Ability to self-fund growth – Prof Sanjay Bakshi

A useful way to start would be to create a framework that can help us identify great businesses. Let’s try to build a framework by analysing earnings of company as in long run it is earnings which drive stock prices

But how do we analyse earnings of the company? I use a triangular approach

Determine the authenticity of Earnings – To ensure an accountant is not cooking the books and accrual earnings reported by company are authentic

Composition of Earnings – A simple DuPont break down of ROE to determine sources of a company’s return on equity. This would help us understand what contributes to high or low return on capital

Source of growth of Earnings – Understanding what factors … Read the rest