The ninth 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 an India-based Education company which has an all-time high price of ~Rs.1025 in 2008 and now last traded price at Rs.1.20.

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 ….

Huge debtor days, declining fixed assets turnover ratio, high RoE% but if we look at Debt/equity then it’s also increasing which tell us that higher RoE% is due to the higher leverage.

I would like to go further detail of it.

If we look at the common size balance sheet then the majority part of the assets side was other assets which have receivables & Cash are most but what others? Also, cash getting reduces and borrowings getting higher. Is this a service company or a finance company where other assets are higher? Also, when a company growing at a higher rate then what is the need of higher borrowings after using good cash balance?

The company got debt on a 2-3% rate. Curious and that is also at the time of higher interest rate.

Company has FCCB which is a more dangerous kind of foreign debt.

We can see that sales growing rapidly but provision for doubtful debts not growing.

The company needs to make provisioning for the doubtful receivables which have two entries – one goes to the income statement and other goes to balance sheet.

On Income statement

When we make a provision for the doubtful debt then increases to the doubtful debt provision goes to the income statement as an expense vice-versa, if decreases into the provision then it will be added to the profit to the income statement.

On Balance sheet

Provision for doubtful debt is getting reduced from the receivables on the assets side of the balance sheet.

So, less provision will boost up your profitability.

Also, when we look at the annual report then the company has made investment worth of ~Rs.70 cr in subsidiaries and from those company generate just ~Rs.24 cr in sales and ~Rs.1 cr in PAT which is just a 1.43% on investment. The company almost doubling investment into the subsidiaries every year.

Also, the company has ~Rs.187 cr worth of contingent liabilities which was ~65% and ~262% of sales and PAT respectively. If this will arise the company’s profitability will be gone for a toss.

The company requires to have a high capital employed for generating high sales growth with negative FCF, this having a better chance to get blow up.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

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.

The seven-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 is trading in a broad range of steel products which has an all-time high price of ~Rs.307 in 2011 and now last traded price at Rs.0.36.

On the first instance this company having huge sales and profit growth. This creates a temptation to buy with missing out of the opportunity.

Also, when we look at the debtor days then….

Reducing… good…

But don’t forget to look cash flow statement….

The company continuously having a negative CFO.

Don’t just get blinded with growth but focus on cash which is real.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation. 

The third 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 which is engaged in providing Services Incidental to Onshore Oil Extraction which has an all-time high price of ~Rs.347 in 2008, ~Rs.308 in 2011 and now last traded price at Rs.0.42.

the company having huge sales and profit growth. Might be having something like a turnaround case or some Capex has started giving result.

But as usual, I get suspected on everything so as per habit I go deeper.

Wow…. What a wonderful company!!!

Company has taken a borrowing but does not have to pay any interest on it. I like it, I also get such a loan then can achieve many things with it. ?

Another point is, the company also need not pay any taxes. Wow… no interest and no tax.

Huge diversion between CFO and PAT but yes, positive and when looking at the FCF then its huge negative.

Now, more feather to add into it… need to compare consolidated and standalone balance sheet.

Here, when we see that company get ~Rs.800+ cr of cash in FY10 but that cash has gone out in FY11. So, where these much of cash gone? When we check the standalone balance sheet then that cash has gone as an investment.

If we look at the few of the items of the balance sheet then we realize that the company has given a huge loan and advances to the related parties. Also, huge other receivable, what meant by others?

If we go and check a list of subsidiaries and few data then we can come to know that three subsidiaries out of five doing well but those three subsidiaries do not get a good amount of capital compared with the first subsidiary which is operated in Mauritius. This subsidiary does not have any turnover, not make any investment into the assets then why need such huge capital?

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.