The eighth 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 in the business of technology infrastructure management services which has an all-time high price of ~Rs.1221 in 2010 and now last traded price at Rs.0.90.
On 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 ….
Controlled debtor days, good fixed assets turnover ratio, high return ratios. Now, no chance to not getting tempted.
I would like to go further detail of it.
The company continuously having a lower CFO compared to PAT. Also, when we take cumulative CFO V/S cumulative PAT then it was Rs.182 cr of CCFO v/s Rs.422 cr of CPAT. So that company able to generate good profit with good growth but that does not able to convert into the cashflow.
Now, we check the tax rates then as per Cashflow its lower tax rate compared to the income statement which creates a cautious sign. It may be possible that profit has been artificially boosted.
If we look at the common size balance sheet then the majority part of the assets side was other assets which have receivables are most but what others? Is this a manufacturing company or a finance company where fixed assets are lower and other assets are higher?
We can see that changes in reserves are higher than changes in PAT. So again, look it as a suspicious. Because when a company pay a dividend from profit then reserve gets reduce and not pay dividend then remain the same. But here it’s increasing.
Now if we look at the FY10 and FY09 reserve constitute then ~Rs.10 cr has increased in securities premium which is due to amalgamation, the capital reserve has increased of ~Rs.9 cr, the general reserve has increased of ~Rs.19 cr and P&L account has increased of ~Rs.59 cr. Such kind of difference was there in all of the years, this creates a question that every year company is getting involved in the M&A or issuing new shares? previous annual reports not available.
Don’t just get blinded with growth & few numbers but focus on cash which is real & every possible aspect.
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
Your posts are always an excellent read.
Thank you very much. ??
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