11 – ONCE A DARLING, NOW AN EVIL

The eleventh part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.

I am starting this part with one of the company is in the business of exports of software and IT related services which has an all-time high price of ~Rs.349 in 2012 and now last traded price at Rs.0.35.

Zylog 01

In the first instance this company having huge sales and profit growth. This creates a temptation to buy with missing out of the opportunity. But after the series of articles, we know to not get tempted with sales & PAT growth.

So, we go deeper ….

Zylog 02

Good return ratio 😊, Huge debtor days with increasing payable days. I also want to meet an IT platform provider who keeps on giving good credit. (Actually, I want to meet and suggest those vendors to Infosys and TCS for taking services from these vendors because Infosys and TCS do not have such good payable days. It might be possible that this management is much better than the management of Indian leading IT companies.)

I would like to go further detail of it.

Zylog 03

If we look at the common size balance sheet then the majority part of the assets side was other assets and that is acceptable in IT firms as they do not have a fixed asset a lot. But here have receivables & Cash are most. Also, cash getting reduces and borrowings getting higher. Where is the cash going? The company might be purchasing assets but as an IT firm, they do not require to have a huge asset.

Zylog 04

I dive deep to check the strength of cashflow. I found that cumulative CFO of Rs.291 cr vs cumulative PAT of Rs.674 cr. If we check cumulative FCF then it will be -Rs.38 cr.

Zylog 05Zylog 06

Now, if we see the cash flow statement in detail then we can come to know that company has capitalized many assets so that profitability of the company gets boosts but when we see adjust to FCF then it will be different than what we have observed earlier.

If we adjust cumulative FCF with capitalized assets then it comes to -Rs.357.33 cr and what we have observed is -Rs.42 cr from FY08-12.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

This series contains learning from books –

Financial Shenanigans

Quality of Earnings

The Financial Numbers Game

Creative Cash Flow Reporting

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