Category Archives: Current temptation, future frustration

“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.

14 – Current temptation, future frustration

Posted on April 4, 2023 by Jimit Zaveri under Current temptation, future frustration

The 14^th 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 the business of Solar consulting & EPC have a 52 weeks low price of Rs.296, 52 weeks high price of Rs.1,990, and LTP is Rs.1,133. This company has rewarded ~283% of return in a year with LTP, and 572% of return in a year with 52 week high.

Let’s start looking at the numbers.

We can see that the company has a decent promoter holding which gives confidence to many people but with it, promoters of the company have ~30.93% of their holding pledged.

We can see the all-time high sale of the company with Operating profit. Even if we look at the CAGR of sales as well as profit then it is also on the higher side.

When we look at the balance sheet then we can see that the company has continuously raised its share capital, now need to check that either through fundraising or through corporate actions. The borrowing of the company is also growing rapidly. If we look at it in detail then the company has raised funds in FY20 and announced a bonus in FY22.

If we look at the numbers with connections then we can come to know that share capital is growing in line with sales growth. But borrowings and working capital are growing at a rapid pace compared to sales growth, which indicates that the company requires a higher working capital as well as borrowings to fund its growth. The reserves of the company are also growing rapidly which is a good sign to fund the growth of the company.

When we look at the cash flow statement then Cash from Operating Activity is -ve in some of the years. The cumulative CFO of FY17-22 is Rs.-19 cr with FCF of Rs.-79 cr so the company needs outside funding for supporting the growth. If we look at the cumulative operating profit and net profit then it is Rs.47.72 cr and Rs.29.65 cr for the same period. This indicates that the company cannot able to convert accounting profit to cash profit.

If we look at the receivables and inventories as a % of sales then it is 60% of sales whereas payable is just 8% of sales so the company needs a higher working capital to fund growth. The Cash Conversion Cycle is continuously worsening mainly due to higher inventory days. The company takes almost 8.5 months to convert its spending into cash.

We can see that the company keeps on diversifying from its original business, even though the company has not properly captured its original business. The existing business is still struggling to strengthen its financial performance and venturing toward new business can be harmful to the business going forward.

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

Disclosure – Companies mentioned in the article are just for example & educational purposes. 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

13 – Current temptation, future frustration

Posted on April 17, 2022 by Jimit Zaveri under Current temptation, future frustration

The 13^th 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 the business of real estate construction and engineering-focused solutions have a 52 weeks low price of Rs.16 and LTP is Rs.24.5, which is a 52-week high price This company has rewarded ~53% of return in a year.

Let’s start looking at the numbers.

We can see that the company has a strong promoter holding which gives confidence to many people to get attracted to the company.

We can see that all-time high sale of the company with Operating profit.

When we look at the balance sheet then we can see a few +ve as well as a few -ve points also. The company is debt-free with very lower fixed assets that need to be utilized to produce revenue. But when we see at the -ve points, then we can see that another liability has increased rapidly in FY20 & FY21, whereas revenue has not grown at that pace.

Also, when we look at the receivables, they that has grown at a rapid pace. Cash on the book was Rs.16.97 cr in FY18 which has gone in FY19 with high growth in receivables. None of the line items has reported change in such a way.

We can see at working capital then found that the cash conversion cycle has worsened rapidly, due to higher debtor days. 291 days of Cash Conversion Cycle in FY18 to 5.38 years in FY20 and 3.68 years in FY21. This shows highly worsening of working capital.

Now, we look at the related party statement then the real face behind beautiful makeup gets revealed.

Here, I found that the company has huge related parties transactions which help to boost sales growth. When we look at the related party sales to the total sales then

Entire sales of FY19 & FY20 come from a related party and in FY21 also has 63% of sales come from related parties.

The company has taken borrowings from related parties but which are categorized as the non-current liabilities.

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

12 – Current temptation, future frustration

Posted on November 7, 2021 by Jimit Zaveri under Current temptation, future frustration

The 12^th 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

11 – Current temptation, future frustration

Posted on October 10, 2021 by Jimit Zaveri under Current temptation, future frustration

The eleventh 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 be saved our wealth.

I am starting this article with one of the company which is engaged in the business of providing IT Consulting and Software Development Services has a 52 weeks low price of Rs.1.68 and LTP is Rs.7.59. This company has rewarded ~4.52x of return in a year.

Let’s start looking at the numbers.