13 – Current temptation, future frustration

The 13th 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.