Q&A: Analysing Unknown Companies, Recommended Investment Books, Profits not leading to Cash Flow

Modified on July 1, 2020

The current article in this series provides responses related to:

  • Clarifications about analysing well-known vs unknown companies
  • The best book to learn stock investing
  • Understanding how the profits get stuck in the working capital and do not always lead to cash flow from operations

 

Clarifications about analysing well-known vs unknown companies

Hello Sir, thank you for the reply. I have a few queries:

  1. I see that the market cap in the excel output of a particular company does not match the market cap stated on other websites like Edelweiss. One reason I can think of is that they are of different time periods. However the values are far different. Is it because of the free float vs actual market capitalization?
  2. Secondly, I see that you have created a portfolio of small and mid-cap companies, which are excellent companies for the purpose of investment. Also, you do not worry too much about these companies on account of the stock markets. I assume that your view would be to stay invested for the period of more than 5 years because even with excellent results of the company the stock may not come into the notice of institutional investors which restricts the gains due to the sentiments associated in the market.

On the contrary, companies that are darlings of the stock markets also to a large extent create value for the shareholders. You have not given any method for making assessments of these companies for long periods of investments. Please share your views for companies of such nature.

Thanks.

Author’s Response:

Ideally the market cap figure would mention whether it is free float or total market cap. If it’s not mentioned, then you have to judge it yourself by spending some more time analysing it.

I focus on companies at with a lower market cap. There is no single road to success and companies in various other segments would also make wealth for investors. However, every investor frames her favourite style of investing.

I would like to delineate a belief that I hold about investing:

“There is no one path to success in stock market investing. Investors have made money in markets by following high P/E growth investing, low P/E value investing, and mix of both, arbitrage, technical investing, large cap investing, mid/small cap investing and many other such approaches. Therefore, I believe that there is no single standard path to succeed/make money in markets. The path an investor should follow is the one she is convinced with and feels comfortable with.”

Readers are right when they mention that good business may not be available at low P/E ratios. An investor is free to invest in businesses with high P/E, if she is comfortable. However, I believe in investing fundamentally sound companies, which are yet to be recognized by the markets. I believe that such companies are present in the markets. Such opportunities might not be aplenty; however, I believe that an investor does not need to find dozens of good companies. My experience in markets says that one company a year is enough.

Nevertheless, there is no one path to success in markets and therefore, if an investor believes in investing high P/E companies, which are valued fairly, then she should invest in such companies without any second thoughts. Investing methods are personal choice.

Read: Hidden Risk of Investing in High P/E Stocks

Regards,

 

Recommended book to learn stock analysis

Which is the best book to understand the financial statement analysis and stock valuation for a beginner who has no background in accounting and finance

Author’s Response:

The Intelligent Investor by Benjamin Graham is the best book.

You may read my review of the book “The Intelligent Investor” here:

Book Review – The Intelligent Investor by Benjamin Graham

Regards,

 

When companies are not able to collect their profits into cash

Sir, I have gone through a lot of topics that you have covered here in the blog including some of the companies’ analysis.

There is one parameter that I am not able to understand. It is about the analysis that you do on the cash flows in which you infer whether the company is able to collect its profit in cash or not.

Can you please cover this topic in a post with the details like using a hypothetical example?

I don’t understand:

  • How a company can survive if it’s not collecting it profit in cash, although it is showing that in profits?
  • How it’s related to receivables?

Please forgive my ignorance it’s just that I am not from finance background. So it’s bit tough for me 🙂

Thanks

Author’s Response:

Thanks for writing to me! I am happy that you found the article useful.

I would suggest that you should read the cash flow statement in the annual report of any company, which would show step by step calculation of CFO from PAT/PBT. The calculation would clearly show how the profits get stuck in working capital. It would be a good learning exercise for you.

Read: Understanding Cash Flow from Operations (CFO)

In case after reading the cash flow calculation, you have any query, then I would be happy to provide my inputs for its resolution.

I might write a separate article about it, however, it may take some time.

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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