Q&A: Cash Flow, Annual Report, Market Timing, Predicting Future Performance

Modified on July 9, 2018

The current article in this series provides responses related to:

  • Cash flow statement
  • Assessing investment in companies with falling share price/business performance
  • Timing investments based on broad market (Nifty) P/E ratio
  • Reading and analysing annual reports
  • Clarifications about the regulatory disclosures
  • Predicting future performance of the company
  • Assessing other income of the company

Query

Sir, I have a query regarding dividend paid out and interest paid.

I came across a situation where dividend paid out in balanced sheet (reserves and capital Note) and dividend paid out in cash flow statement (CFF) with different set of numbers. So, to find out dividend per share which set of numbers should be used? Similar for interest paid out?

Author’s Response:

Hi,

Thanks for writing to me!

You may find different numbers for dividend paid out as the number in cash flow statement includes all the dividends paid out during the year, whereas the number in the balance sheet might include only the dividend which remains to be paid out at the balance sheet date (March 31) and for which provisions have been done.

For interest, you should take the number from the cash flow statement as this includes the entire interest outgo during the year. Whereas the number in the P&L is only the amount of interest which is expensed during the year and excludes the interest which is capitalized during the year in the form of fixed assets or WIP. However, it is best to calculate the interest outgo on your own by taking average of the debt outstanding at the start and the end of the year and by assuming a reasonable applicable rate as many a times companies do not give the actual interest data in either P&L or CF statement.

Read: Understanding the Annual Report Of A Company

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

Hello Sir, Thank you so much for educating us with valuable knowledge on investing. Can u pls clear my doubts?

1. After the fundamental analysis we invest in a company. After some time the company produces poor sales from the prev years and so the price falls down. In that situation since we are invested in the company do we prefer to add to our positions or we hold or exit the stock. How long we can give time for a company to recover from its position since it has good past records, considering how the company is performing in the sector with its peers.

2. In most of the analysis I find the sector leader has good moat advantage and sure they have high PE at which we r not going to invest.

So what if the moat of the company is avg but which has good fundamentals with the all the criteria that ticks our box to buy. I do accept if there is moat advantage that company is going to have considerable growth apart from the others in the future. But what if we cannot find a moat but has good fundamentals and how do we react to this situation

Author’s Response:

Hi,

Thanks for writing to me!

1) It is advised that investors should keep on buying stocks of a company, even when the stock price is falling, until the time they are convinced that the problems being faced by the company are temporary in nature i.e. are because of the external factors and not because of the poor management decisions. Such an opportunity provides great investment avenues.

2) Usually good fundamentals and moat go hand in hand. Rarely, an investor would find that a company has good fundamental but no moat. Therefore, I would suggest that an investor should invest in a company with good fundamental even though she is not able to find out the sources of its moat. She should rest assured that if the company has good fundamentals, then it would have some advantages over its peer, though these advantages may not be visible in cursory analysis.

Read: Business & Industry Analysis Of A Company (Assessment of Moat)

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Query 

Vijay Sir I have a question. Do you think for an average investor, buying NIFTY ETFs at historical low PE which is around 12-14 and selling at high PE >20 will fetch very good returns? Is there any problem which I am blind to in this approach?

Author’s Response:

Hi,

Thanks for writing to me!

The approach of waiting for Nifty to correct to low P/E for 12-14 and then waiting for the P/E to rise to >20, resembles timing the market. There is no defined timeline with in which the P/E will get to the expected levels of the investor. However, the investor might miss the investment opportunities during this waiting period.

I believe that investors should not try to time the markets but stay in the markets irrespective of the market conditions.

You may read further about my views in the following article:

Getting the Right Perspective towards Investing

All the best for your investing journey!

Regards,

Vijay

 

Query

Can you please show where can we find the following information in annual report of a company?

  1. Production capacity (tonnes per annum)
  2. Quantity sold (tonnes) (A)
  3. Sales price per tonne (INR) (B)

Author’s Response:

Hi,

Thanks for writing to me!

Production capacity and quantity sold used to be disclosed in the annual reports until a few years back, I guess up to FY20012, if I am not wrong. Now companies do not have to compulsorily disclose it. However, many companies still disclose this data as part of corporate presentations, result presentations, annual reports etc.

Read: Understanding the Annual Report Of A Company

Sales price per tonne is a calculated figure from Total Sales/Quantity Sold.

Hope it clarifies your query!

All the best for your investing journey!

Regards,

Vijay

 

Query 

Read: Analysis: National Fittings Limited

Hi,

I have a doubt regarding the capacity utilization of the plants running, and that can we estimate the increase in capacity after it receives the ₹20 cr loan? Only then we will be able to get an idea of the future sales growth rate I believe.

Author’s Response:

Hi,

Thanks for writing to me!

The approach of estimating the timings of future capex, capacity utilization and the sales growth is one of the ways used by analysts to ascertain future sales growth. You may take reasonable assumptions about it. However, you may need to check the progress/sustainability of these assumptions whenever the company comes out with new disclosure about whether it has received the loan, started the capex etc.

However, I as an investor do not use and neither recommend drawing future projections for arriving at the opinion about the stock/company.

Regards,

Vijay

 

Query

Hi Doctor, Good evening

It’s wonderful to read ur articles, thanks for ur time and effort. One doubt from my part.

Suppose I have the annual report (AR) of 2014-15 with me, but the related party transactions or the salary increase or any other benefit was passed on to the promoter in the year 2011-12. So that won’t get reflected very obviously in the 2014-15 AR.

How to cope with this?

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

You are right that the past event would not be obvious, if the investor reads only the latest annual report. This is one the reasons that it is advised that the investors should read annual reports for at least last 10 years before making the final investment decision about any stock.

Read: Understanding the Annual Report Of A Company

All the best for your investing journey!

Regards

Vijay

 

Query 

Dear Vijay,

It’s great that new premium services are being offered which will help a lot of new as well as old investors. I can’t thank you enough for your yeomen services. However I had a query. You had initially mentioned that you were disclosing the portfolio stocks (not the price, quantity and other details) as it was a regulatory requirement for SEBI registered Investment Adviser. The home page of your blog still states

“I have disclosed stocks in my portfolio on a dedicated page: My Portfolio. I suggest you see the list of stocks I own before you interact with the website & me because it is assumed that my views can be biased when I opine about any stock which I own and therefore, have a financial interest.”

You may need to remove this paragraph if it’s conflicting with the regulations. Regards

Author’s Response:

Hi,

Thanks for writing to me!

The SEBI guideline states the following:

“Research analyst or research entity shall disclose the following in research report and in public appearance with regard to ownership and material conflicts of interest: (a) whether the research analyst or research entity or his associate or his relative has any financial interest in the subject company and the nature of such financial interest;”

Therefore, a disclosure about whether the analyst owns shares of the company about which she is giving an opinion, is sufficient to meet the regulatory requirement. Disclosing the list of all the stocks of personal portfolio is not envisaged in the regulations. Otherwise, you would have noticed all the equity research reports containing a separate section containing the list of stocks of all junior & senior equity analysts whose names are mentioned in the equity research reports. Similarly, if the intention of the regulations was to get full disclosure of the list of stocks in the analyst’s portfolio whenever they opine about any stock in public media, then you would have seen the market experts on the financial media carrying the list of their portfolio stocks with them in the programs and reading it out each time they opine about any stock.

The dedicated portfolio page containing the list of stocks in my personal portfolio was a disclosure over and above what the regulator has stipulated, which I have now converted into a premium service.

I thank you for bringing the disclosure at the “About” page to my attention. I have edited it, as the description/contents of the portfolio page have since undergone a change and I have edited the disclosure on the “About” page accordingly.

Thanks once again for providing your feedback.

All the best for your investing journey!

Regards,

Vijay

 

Query

Sir, pls guide me, how to calculate or estimate coming quarter profits by seeing its previous quarter profits, sales or inventory, as we see that every channel and analyst estimates coming quarter earnings, how can we predict sales of any company and profits?

Thanks.

Author’s Response:

Hi,

Thanks for writing to me!

I do not rely on future projections. I believe in associating myself with a sound management running a fundamentally good company and riding the investing journey with them. I try not to project earnings 5-10 years down the road. Therefore, I do not use any parameter for analysis based on future values and would be unable to help you in the matter of estimating results of upcoming quarters.

All the best for your investing journey!

Regards,

Vijay

 

Query 

For other income, we are supposed to compare with cash + investment. Do you mean we have to do other income/cash+ investment * 100 to check whether its return is less than or equal Bank’s FD?

Author’s Response:

Hi,

Thanks for writing to me!

Using the figure of other income/(cash + investments) and comparing it with bank FD return might not be very accurate as the investments in the data provided by the screener clubs current investments (mutual funds etc.) as well as the equity investments in the JVs etc. (from where the company might receive only dividends).

I use the bank FD returns to compare it with the PBT/Net Fixed Assets to assess whether it makes sense to have all the assets and take the pains of running a company. In case PBT/NFA is not more than bank FD return, then it seems like selling the entire assets and investing in FD would be beneficial for shareholders.

Hope it clarifies your queries!

Regards,

Vijay

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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