Tradevesting — Notes — 4
Class 4 — Complete Financial Analysis
The depth of financial analysis should be limited to the aspects important as business owner for decision making.
Ignore trivial things at home, at office and in life.
Market Capitalization: all shares at current market price (CMP)
CMP is per share and Market Cap is per company.
Multibaggers can be identified using market cap: like Asian paints vs Indigo paints, Britannia vs Mrs Bector Food, Angel One vs 5 Paisa.
Indian economy (2300$ per capita) is in self-sufficient and self-growth mode.
The world is divided in three parts: US/UK/EU, India/Middle East and South East Asia.
- Per Share ← → Per Company
- Current Value ← → Market Cap
- Book Value ← → Share Capital + Reserves
- Face Value ← → Share Capital
Actual Book value can’t be estimated due to current value of Land, Machinery and Brand can’t be quantified/adjusted.
Conviction is built on business understanding.
Huge fixed assets purchased at right time, at the right place create entry barrier.
Paper industry (JK Paper) revived due to packaging, Sugar industry (Mawana/Bajaj Hindustan Sugar) will be revived due to ethanol usage.
Price-Earning (PE)Ratio: (Payback period)
Market Cap/Net Profit ← → CMP/EPS
PE needs to be looked into in conjunction with net profit, how quickly the net profit is growing?
PE originated from US factories as dividend was important then.
Private companies have high PE; for PSUs, PE has its owned importance.
CWIP → Capital work in progress.
Capacity (up) + Inflation (down) = Net profit (up)
Look for forward PE based on next year’s net profit.
For private companies, if PE is low, its good, but if its high, it is not necessarily bad, similar reasoning can be applied for current and book value.
Dividend Strategy:
Dividend Yield → 1.5%-2% large caps (on average)
PSUs give upto 8–12% as dividend, buy high dividend yield companies when its 20% down from 200 SMA, and sell when its 25% up (at same price) with 15% dividend. (e.g. Hindustan Zinc, Sanofi India, REC, Coal India, Swaraj Engines, HUDCO, GAIL, Power Finance Corp, Bharat Petrol Corp, RITES)
Return on Capital Employed (ROCE): earning % on available funds, it includes borrowed money as well, this is not relevant for banking and financial companies.
Return on Equity (ROE): applicable for banking and financial companies.
ROCE > 30% or ROE > 10% means great companies, will keep touching all time high (ATH) often.
15% < ROCE < 30% : means above average companies.
Promoter Holdings: Strong hands vs Weak hands is more relevant. In general, avoid > 30% holding with public (weak hands).
Pledging % depends on the business model, avoid > 10% pledging.
Debt to Equity < 25% (except Banks and NBFCs)
Debt is the root cause of all the problems in life.
Quarterly sales and profits to be compared with same quarter of previous year.
Operating profit margin (OPM %) needs to be compared within same company for previous quarters.
All kinds of manipulations are done in other income and income tax.
Quarterly results needs not to be given much importance, especially companies with 10–15 years of track record.
Check for abnormality in the other income and income tax.
Depreciation ← → Fixed Assets ← → CWIP
Expenditures are of two types: 1. Operating expense (for past, already used or consumed, expenses in P&L) 2. Capital expenditure (for future, will be used or consumed, fixed assets in balance sheet)
Fixed assets means being used, CWIP means non-usable currently.
Depreciation = Asset Cost / Asset Life (est)
Liabilities are payments to be made but are not loans.
Concalls are the most important thing, Concall Notes are also available on screener.
