08 – Current temptation, future frustration

The eighth part of the Series is “Current temptation, future frustration”. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.

I am starting this article with one of the company which is engaged in consultancy and advisory services in the field of management, IT, technical, industrial, personnel and labour, legal and taxation, financial, commercial and investment, capital market, consulting engineers, operational research consultants, computer service, and marketing services has a 52 weeks low price of Rs.5.26 and LTP is Rs.93.6, 52-week high price – Rs.99.5. This company has rewarded ~17.79x of return in a year.

Let’s start looking at the numbers.

We can see that the company has a high volatile OP Margin%, the company has achieved the highest ever profit in FY20. So this matrix seems good.

When we look at the common size balance sheet, then we come to know that the highest assets side item is other assets. Now, a consultancy company can have such an item but still, we have to do further digging.

The majority of assets account for loans and advances which nearly 85% of the total balance sheet. The company has not given any detailed breakup of loans. But when we read further notes then

The above note put seeds of doubt in our mind.

The company has major expenses are recorded as per bad debts which is 13.66x and 75.48x of net profit in FY20 and FY19 respectively. This will create trouble for the company.

The company does not have a good return ratio.

When we look at the shareholding pattern then promoters hold only 1.40% and the remaining hold by the public. If the promoters have trust in the performance of the company, then they have to hold higher holding.

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

WARREN BUFFETT’S LETTER – 2011 – 2012

Warren Buffett’s Letter 2011

Mr.Warren Buffett has explained on the commodity to brand-

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One of the plastic product manufacturing company which use crude oil & it’s derivatives as a raw material but due to selling a brand company can increase a profit higher than growth to the sales

Supreme Ind

One of the footwear manufacturing company which use rubber, plastic I.e. crude oil derivatives as a raw material but due to selling a brand company can increase a profit higher than growth to the sales

Relaxo

Mr.Buffett on investing-

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When we make a compromise with our need and make an investment of those savings to the proper assets, we can able to receive more purchasing power in the future. We need to majorly focus on the beating inflation for the longer period of time which will provide us a more purchasing power in the future. Our minimum target to earn a return from our investment should be inflation rate + GDP growth rate. This is an appropriate return which will provide us a more purchasing power in future and also build us wealthier. During the current scenario in India, inflation rate 3.77% + GDP growth rate 8.20% = 11.97%, it should be a minimum threshold return from the investment we make.

If we look at the 10 years average inflation rate and GDP growth rate in India then it is 7.71% and 7.17% respectively. So that if we have made an investment in the year 2007-2008 than we should have minimum threshold return of 14.88%. and for the last 20 years is 14.60%.

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Warren Buffett’s Letter 2012

Mr.Buffett on intrinsic value creation –

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Mr.Buffett on capital-intensive business –

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We can use a similar parameter for analyzing a capital-intensive business. Here, we can check that whether the company has higher interest coverage after paying current year interest cost or not. This parameter indicates that the company can pay comfortably interest cost on additional borrowing or not. Such quality will not easily available with all the capital-intensive companies so that we can able to filter out good company from the capital-intensive business segment.

One of the FMCG Company which is the manufacturing and marketing of household products and personal care products

Godrej Consumer

One of the laboratory business company of India

Thyrocare Tech

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 2004 – 2006

Warren Buffett’s Letter 2004

Mr.Buffett has explained why many of the investors do not able to create wealth by investing into the equities.

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When we trade extensively then we incurred an additional cost which reduces our return. Also, many of us follow tips of others and rely on others which also reduces investment return. Many of people start investing when market continuously moving into upward direction with the fear of losing an opportunity to earn and get exit from the market when the market starts moving downward with the fear of losing investment. Rather we should increase our investment when the market is continuously moving downward.

Mr.Buffett has been explained that one of the ways to survive into the commodity-like business is to become a low-cost producer. Commodity business generally does not have pricing power and prices of a particular commodity are decided based on the demand & supply of a particular commodity so that they have to focus on the costs.

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Warren Buffett’s Letter 2005

Investment + Cash per share at Berkshire Hathaway –

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Per share value of non-insurance business –

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During January – 2006, the price of a share of Berkshire Hathway – A was traded at $90,000.

Mr.Buffett’s thought on Moat

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The strong moat can result in a strong flow of float. If the company having a moat then the company has the ability to raise prices, getting the float, higher return ratios, raising market shares, etc.

Indian Companies Examples

One of the two-wheelers and commercial vehicle manufacturing company of India

EIM

One of the four-wheeler manufacturing company of India

Maruti

We can see that float is also getting compound over a period of time which benefits to the company to survive for the long-term and to create wealth.

Why investors are not able to make money through the company can earn well –

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Warren Buffett’s Letter 2006

Warren Buffett answer for his currency derivatives position –

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We need to focus on avoiding mistakes which can spoil out our wealth. If we focus on avoiding mistakes then half of the battle, we won.

Mr.Buffett on Walter Schloss

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Mr.Buffett on people who clone others’ portfolio –

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Mr.Walter Schloss is one of the investors who have an influence on my investment decisions. I keep his advice always with me. (Published at Safal Niveshak –

https://1icz9g2sdfe31jz0lglwdu48-wpengine.netdna-ssl.com/wp-content/uploads/2015/01/Walter-Schloss-16-Rules-to-Make-Money-in-Stock-Market.pdf )

Warren Buffett’s Letters 1957 – 2012

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