The fourth part of Series “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 series with one of the company which is engaged in Entertainment / Electronic Media Software, has a 52 weeks low price of Rs.3.05 and LTP is Rs.9.20. This company has rewarded ~3.02x of return in a year.

Let’s start looking at the numbers.

We can see that the company has operating level profits but a loss at a net level. It can be possible if the business is at the nascent stage. But major expense is depreciation so have to check why huge depreciation charge.

When we look at the balance sheet then it seems that the company does not have any issue except debt. But when we look at the fixed assets then we get shocked. The depreciation rate is ~40% in FY19 and ~72% in FY20. I have not seen such a high-interest rate in other leading IT companies, there is max ~20% of depreciation rate in other IT companies.

When we move to the next, related parties then….

Then 72% of income in FY20 and 78% of income in FY19 comes from related parties. The company has 93% of receivables in FY20 of related parties.

This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.

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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