Learn how to Dissect RoE

There is almost a unanimous agreement in investment community that RoE is an important indicator of health of a company, High sustainable ROE implies sustainable competitive advantages and hence investment attractiveness of the company

Sustainable is a key word here so always execute ROE analysis for at least 5 years if not 10 years to arrive at a conclusion

DuPont comes in handy to break down ROE, I will not go into details of DuPont , you can read this article to get yourselves accustomed to DuPont

You can use Tankrich Valuation Tool to do DuPont analysis in 5 mins, post analysis how do you dissect RoE ?

This will be largely dependent on how familiar you are with operations of the company and industry, We will take a case today and see if we can put together a generic framework for dissecting RoE

Friends this is going to be a long post so take out your pen, paper, food and time and lets dig in. The company that we will use as case is Ajanta Pharma

The RoE for last 5 years has been ..

roe-1

Fantastic improving from 16% to 41%

The frame-work that we are going to use … Read the rest

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Did the Peter Lynch Screener worked ?

Did the Peter Lynch Screener worked ?

In June 2014, I created a stock screener after re reading ‘One up on wall street’ by Peter lynch. You can read the old post here now lets review how those stocks performed vis a vis broader markets

1 Tata Consultancy Services Ltd. 2213.55 2696 21.80%
2 Lupin Ltd. 983.4 1838 86.90%
3 Amara Raja Batteries Ltd. 491.45 902 83.54%
4 MindTree Ltd. 807.65 1466 81.51%
5 DB Corp Ltd. 299.7 391 30.46%
6 CMC Ltd. 1689.2 2023 19.76%
7 Persistent Systems Ltd. 1060.75 1870 76.29%
8 Lakshmi Machine Works Ltd. 3697.35 3794 2.61%
9 Monsanto India Ltd. 2131.5 3282 53.98%
10 eClerx Services Ltd. 1169.15 1572 34.46%
11 NIIT Technologies Ltd. 427.5 417 -2.46%
12 Finolex Cables Ltd. 162.1 279 72.12%
13 Dhanuka Agritech Ltd. 380.35 642 68.79%
14 Zensar Technologies Ltd. 394.65 731 85.23%
15 VST Tillers Tractors Ltd. 1818.15 1592 -12.44%
Average return (equal weight portfolio) 46.84%
CNX Midcap 25.36%
BSE Small Cap 18.42%
Sensex 16.73%

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An investor’s dilemma

An investor’s dilemma is perfectly captured in below lines

To be, or not to be, that is the question Whether ’tis nobler in the mind to suffer, The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles

Shakespeare would have never thought that centuries later lines from Hamlet will truly reflect the state of Indian investors.

Re read [ Interpretation Mine 🙂]

To be, or not to be: that is the question Whether ’tis nobler in the mind to suffer [Notional loss of having missed the biggest bull run in Indian equities in last 5 years], The slings and arrows of outrageous fortune [Envious pain of neighbours making baggers overnight], Or to take arms against a sea of troubles [Jumping and buying companies touching 52-week highs every day and selling winners]

During a bull run (read now) an investor is trapped in various dilemmas, on one hand he is reluctant to buy  businesses making sequential 52-week highs, I did a post on why it is not a very smart idea to overlook stocks hitting 52-week highs, however the bigger dilemma is right under his nose his very own portfolio

Imagine this,

As … Read the rest

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How accountants can trick quality of earnings

Quality of earnings is very difficult to assess as swindlers have so many tricks up their sleeve,One of techniques that I personally use to separate good from odinary business is by using Earnings Power Box, I have done a detailed post on it you can read it here

This post is an extension to that post equipping retail investors to assess quality of earnings.

There are two simple ratios using accruals not often reported or put on financial websites but they do explain the state of quality of earnings, they are calculated by using two different approaches

Balance sheet approach

Calculate Accruals which is difference between beginning and ending NOA (Net operating assets)

Here, NOA = Net operating assets = {(Total assets – cash and equivalents and investments) – (Total liabilities – Total debt)}

Accruals BS = NOA END – NOA BEG

The Accruals ratio is    = Accruals BS / Average NOA

Lower the ratio, better the earnings of the company (Remember this)

The second approach is Cash flow approach

Accruals CF = Net Income – Cash Flow Operations – Cash Flow from Investing

Accruals RatioCF = NI-CFO-CFI / Average NOA

Again, lower the ratio, better the earnings … Read the rest

Trend Investing – Second Take

On 25th may 2014 we wrote about how traders can ride the Modi momentum in large cap companies, we created a management and momentum box, read the old post here

After 9 months, let’s look at some of the interesting data, all the quadrant has been labelled as Q1,Q2,Q3 & Q4 as per below for ease of understanding

Momentum and Mangement box_editedThis is the average returns made by all four quadrant

 

Modified-1

We wrote in May ,

“The underlying theory is simple good companies with capable management will be able to leverage the modified environment to their advantage much faster than good companies with shallow management “

It did came out true as well with Q2 having highest return to date, both Q3 and Q4 on an average were not able to beat return to date market (Sensex) returns

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How using only excel as a tool to invest can make you really poor !

The operative word here is only , I have seen far too many causalities where the projected numbers have looked fantastic and people invested without bothering to understand business and the story have had miserable returns

What to do when you are really optimistic about future of the company want your customers to buy ?

Take out an excel and start to put fancy projections, numbers never lie and when given an ascending pat they present a rosy picture to gullible investors

Don’t believe me ?

See the below extract from a brokerage report on Phoenix Lamps, obviously the brokerage house was gung-ho about sales projections and profit projections.

Excel work

Excel -1

Actual results were not as rosy as excel and the stock predictably nosedived

Excel -2

As an investor how can you avoid it ?

Should you stop using any tool for financial projections ? I would not recommend that but use excel or for that matter any tool as an aid and not as decision maker.

Make investing process a little simple, write these simple questions and answer them in writing before making any long term investment

  • What does the company do and how it creates value (earns money) ?
  • What
… Read the rest

How to read annual reports

“When asked how he became so successful in investing, Buffett answered: ‘we read hundreds and hundreds of annual reports every year.”

An annual report in many cases is a voluminous 100+ page boring document and even the best of minds would find concentrating tough. So how to make it an interesting read ? one way to do it would to be read it like a story book and then it would becomes a story of the business. This technique has helped me over years to pore through pages after pages

Let me share an example

First download the annual reports of the company that you want to study from BSE website at least for five years, Now there are many sections in an annual reports and each of them is very important however to understand business and learn from management commentary cut the Management discussion and analysis section and the directors review of operations section

Then paste those sections in a word document in a chronological order, now the fun begins.

Print those sections

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Use brokerage reports to gain insights

It has become fashionable for investors to slay brokerage reports and broking community as whole, while there is no denying fact that sell side analysts often have incentives to churn out report after report to keep the client trading, However we can’t discard the good work done by brokerage community, some of the brokerage houses certainly do a fair leg work and follow-up on their recommendations.

I think we as investors can benefit by using one simple principle – Separate Fact from Fiction

So how do we do it ?

Inquisitiveness will help us, in this post I would run an example using an ICICI Direct and Dolat Capital report on IPCA laboratories to demonstrate how we can leverage on good work done by these brokerage houses. Interestingly one brokerage is recommending sell while other one is recommending buy – Love these situations 🙂

Let’s begin download copies from here & here, and to gain maximum from this post keep those reports and read them in tandem with content below

First up commentary on,

Operating Margin

ICICI

EBITDA margins increased ~314 bps to 24.7% (I-direct estimate: 24.0%) mainly on the back of an improvement in gross profit margins and

… Read the rest

How to avoid weapons of influence in investing ?

Robert B Cialdini’s Influence: The psychology of persuasion is a must read for any budding investor and thinker. In this best seller he describes six weapons of influence that are often used by marketers/smart people / organisation to stir an automatic reaction from subject many a times to the benefit of the user of weapon

What are these weapons and how we should avoid them in investing when they are used against us ?

We avoid them by learning about them, Let’s start

Reciprocation – The rule of reciprocation says we should try to repay, in kind , what another person has provided for us . Seems so obvious if someone invites you for a dinner at home you do so by inviting other person to your home .

In investing how can someone trick you ? I have experienced such situations let me throw an example at you

Complete stranger on Twitter : Hi, How are you ? I have just read “Evaluating Moats through Floats” on Tankrich and have found it really helpful, I have some more question for you ?

Me : Thank you , please let me know what questions you have.

Stranger :

… Read the rest

Don’t be scared of stocks hitting 52 week highs

If you are a value investor and short-term investing is an untouchable concept for you perhaps you will not find much interest in below post

As a traditional investor we don’t know pay attention to stocks hitting 52 weeks highs on a regular basis as they are considered to be hot stocks or tip stocks gamed by speculators. But ignoring such stocks in not a great idea if you are a practical investor

Imagine you were a retail investor and had seen Symphony Ltd mount back to back 52-week highs in Jan’14 . Due to the way we are programmed we would ignore such info and look for other bargains in the market

Have a look what happened in one year

sym-52

In last 365 days the stock has hit a new 52 week highs (the green dots) 67 times. Almost 1.25 times a week

What stops us from buying 52-week high stocks ?

Anchoring bias – The anchoring effect describes how we can be influenced, or “anchored,” on specific information, when stocks are at a 52-week high, this creates a psychological barrier of sorts, beyond which investors think the stock is unlikely to go. Investors discount the possibility that the … Read the rest