12 – Current temptation, future frustration

The 12th 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 article with one of the company which is engaged in the business of manufacturing and selling UPVC pipes and fittings has a 52 weeks low price of Rs.20 and LTP is Rs.80, 52 weeks high price of Rs.85. This company has rewarded ~4.25x of return in a year.

Let’s start looking at the numbers.

We can see that no growth in sales of the company or PAT, especially from FY16-21 (take FY21 as a washout year then also).

We can see at working capital then we found that the cash conversion cycle is improving YoY, due to higher payable days. Also, payable as % of sales improving. At first, we get excited and feel it is a turnaround. But then quote of sage Mr. Buffett comes to my mind – “Turnarounds seldom turn.” So, I try to check deeper. And I found related parties’ transactions.

Here, I found that the company has huge related parties transactions which help to boost sales growth as well as it has outstanding payables which are also higher. I thought to adjust both payables as well as sales to derive ex-related parties’ figures.

If we see adjusted with related parties then cash conversion cycle days increased by 51 in FY18, 61 in FY19, 64 in FY20, and 74 days in FY21.

Investment also parked to associate company.

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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