April 20, 2017

Q&A: Share Pledge, cCFO vs cPAT, Basic & Diluted EPS, Conference Calls

www.drvijaymalik.com has a section dedicated to answering queries of readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. I have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to:
  • Interpreting pledging of shares by promoters
  • Sources of conference call (concall) transcripts
  • Cumulative CFO vs cumulative PAT
  • Basic and diluted EPS


Answers to readers’ queries related to pledging of shares by promoters, cumulative CFO vs PAT, Basic and Diluted EPS, sources of Conference Calls transcripts


Query


Hi Vijay,

I hold shares of a company named Menon Bearings Ltd. Last month they announced an interim dividend of INR 1 per share. Recently, the promoters have pledged 8.3% of their shares to Bajaj Finance Ltd for reasons not explained in the report submitted to BSE.
  • Promoter holding before pledge is 75%.
  • Number of floating shares – 46,700,000
  • Pledged shares % - 8.3 %
  • Amount of pledged shares – 5,604,000

I'm curious why the company has to pay an interim dividend, instead, they could have used the amount on capex.

Thanks,

Author’s Response


Hi,

Thanks for writing to us!

Ideally, any pledge of the shareholding of promoters' should be seen with caution. However, many times, banks/lenders stress on promoters of small companies to pledge their shares in favour of banks, in order to mitigate their risk and to increase the commitment of the promoters in repaying their loan.

If the promoter is a small time entrepreneur, then he/she has no other option but to pledge the shares, however, promoters of large companies have many other competing financial institutions, which can give them loans. Therefore, if the shareholding of the promoter of a large company when pledged, should be seen with extreme caution and should be analysed further to know whether the promoters' shareholding is pledged for loans taken by the company or for loans taken by the promoter in its personal capacity. The annual report of the company contains required information to make this judgment.


Therefore, any pledging of shareholding by promoters of large companies should be treated with caution.

Regarding, payment of dividend instead of using the money for capex. We believe that the best way to get such clarification and understanding the future plans is to contact the company directly. You may contact the investors' relationship officer or the company secretary for the same.


Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Hello Dr. Stock,

I have noticed that in the various stock analysis, you use management past conference call scripts or management interview scripts as a tool of analysis. From which source do you get such information?

I tried searching on companies’ website – Investors’ relation segment, but couldn't find any. Also, I tried doing a google search but I failed.

Please advise the source to find this information.

Author’s Response


Hi,

Thanks for writing to us!

There is no single source for concall transcripts. It would differ from company to company. You may check each of the following sources for the companies: 
  1. Company website> investor relations
  2. BSE exchange filings
  3. Researchbytes. com 

If the concall transcript is in public domain, then in all probability, you would get it from either of these three sources.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


I tried to work on your suggestions but still, I have some confusion. Please help me in understanding the ratios below.
My queries are as below.
  1. CFO is always higher than net profit in normal cases. Is it correct? When we calculate CFO, we add amortization, depreciation and finance cost with PBT. But when we calculate net profit, we subtract amortization, depreciation and finance cost.
  2. CFO lower than net profit means that cash is getting struck in working capital (inventory or trade receivables) and in some cases, higher payables may also reduce the CFO of the year. Am I correct?
  3. See the example of GSFC. Cumulative (10 Years) CFO is ₹4,367Cr and cumulative net profit ₹4,406Cr but still receivable are also high at ₹3,308Cr. How to relate all three in this case? Debtor days also very high.


Author’s Response


Hi,

Thanks for writing to us! It's very pleasing that you are doing the hard work of interpreting the cash flow statement. 
  1. It is right that normally CFO should be higher than PAT and it’s because of the reasons cited by you. 
  2. It is right that CFO can be lower than PAT due to either working capital related factors or also due to high non-operating/other income, which would form part of CFI (dividend income etc.) 
  3. As we have discussed CFO vs PAT for a single year, the same is true for 10 year period as well. In 10 years, the increase in receivables would reduce the CFO whereas cumulative depreciation/amortization and finance cost will increase the CFO. Rest for the real reasons, one would have to analyse the cash flow statements from the annual reports of each of the last 10 years and one would get to know the exact factors leading to a certain level of CFO.



Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Sir, I have been following your website since long and based on that, I feel this is one of the best websites for learning the intricacies of stock-picking. No other website matches the quality of this website. I would like to thank you for creating this masterpiece.

On another note, if for a stock, the other income is considerably high, then there are some chances of cumulative cash flow from operations (cCFO) being lesser than cumulative net profit after tax (cPAT). In those cases, what we should do to make sure that the company is not manipulating its P&L.

Please advise.

Thank you and best regards

Author’s Response


Hi,

Thanks for your feedback! We are happy that you found the articles useful!

We appreciate that you are spending time and effort to understand the cash flow dynamics of companies, which is an important tool to understand the investibility of any company.

You are right that in the case of high other income, the CFO can be lower than the PAT. Such kind of assessment would indicate to an investor the ability of the company to generate a cash flow, which is sufficient to meet the fund's requirements like capital expenditure (capex) or debt servicing etc.

Once an investor is able to identify that the CFO is lower due to other income, then she can take a case specific investment decision depending upon the nature & amount of non-operating income as well as the nature and amount of funding requirements like capex or debt servicing etc.

Such decisions need to be taken on a case by case basis and there would not be any specific guideline applicable to all the cases.


Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Query


Hello Sir

Every article by you is increasing the knowledge base of new investors. I find your articles more relevant and useful than reading a book of foreign writers (that too mostly written in 1960's and has reference to USA markets).

My question is that whether one should take total outstanding shares for analysis or total authorized shares. If I understand right, then the warrants, if exercised, will be an addition to the total outstanding shares.

Also in Debt to Equity ratio: equity considered is only float equity or total outstanding equity?

Author’s Response


Hi,

Thanks for writing to us! It is nice to know that you have found the e-book useful.

1) Total outstanding shares for analysis or total authorized shares. If I understand rightly, warrants, if exercised will be an addition to the total outstanding shares.

EPS based on total outstanding shares is called Basic EPS, whereas the EPS after considering the impact of warrants etc. is called as Diluted EPS. Companies report both the EPS in their financials. It is advised that diluted EPS should be preferred for analysis.

2) Also in Debt to Equity ratio...equity considered is only float equity or total outstanding equity

We consider equity as "Shareholder's Funds", which includes equity as well as reserves and surplus.


Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik 


P.S:




DISCLAIMER


Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:


Currently, I do not own stocks of any of the companies discussed above