Q&A: Companies with low growth & corporate governance issues, Portfolio Composition, Impact of changing balance sheet presentation on ratios

Modified: 02-Jul-20

The current article in this series provides responses related to:

  • Should we consider companies with low growth and corporate governance issues?
  • Clarifications about how many stocks to have in the portfolio
  • Impact of changes in the balance sheet presentation format on financial ratios
  • Sources of financial data for companies
  • How to receive dividends on shares

 

Should we consider companies with low growth and corporate governance issues?

Hidden Risk of Investing in High P/E Stocks

Hi Sir,

I would request your inputs and views.

(1) I am tending to prefer a Hero Motocorp or Bajaj over Eicher because of the established business and comparatively lower valuations; same time (2) I am preferring a Kotak/ HDFC bank over PSUs or Axis or ICICI because of its track record and long road ahead; same is the case with a Gruh over LIC housing or Indiabulls Housing.

If avoiding low-growth and non-governance companies has a cost, then shouldn’t we be taking that cost (not in all cases, but in most cases)? Because that cost in long-run would protect our capital.

Is even looking at low-growth (in foreseeable future) and mis-governance companies, right, considering they are the ones predominantly trading at low PEs now.

Author’s Response:

Hi,

Thanks for writing to me!

We believe that every investor should have her own stock selection strategy as market is a place for different investors to come together and enter into a transaction, which reflected their individual views. There are investors who follow arbitrage, technical, fundamental, low P/E, high P/E, turnaround etc. among many prevalent strategies.

However, we advise investors to focus on companies which have achieved a growth rate of 15% or more over past 10 years, are conservatively financed, managed by competent personnel with integrity and available at a low P/E ratio.

We do not believe in investing in low growth companies. Moreover, companies with governance issues must be avoided whether these are low growth or high growth.

Read: Why Management Assessment is the Most Critical Factor in Stock Investing?

All the best for your investing journey!

Regards,

Vijay

 

Clarifications about how many stocks to have in the portfolio

How Many Stock You Should Own in Your Portfolio

Good read. It is mentioned that owning more than 30 stocks wouldn’t benefit the diversification as all the stocks fall equally during crisis. By this aren’t we suggesting that stock performance is bad due to ‘external factors’ (the entire economy doing badly)

Also, it is proposed that we should concentrate our portfolio so that we could benefit from good. But doesn’t that suggest that when a stock rises, it is due to ‘internal factor’ (great management, business etc.)

Author’s Response:

Hi,

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

I would want to clarify that the article mentions that

“The above graph from Financial Analysts Journal, indicates that if an investor adds more stocks in the portfolio beyond 30 stocks, it would not reduce any further risk in the portfolio.”

This is because with each addition of a new stock the diversification benefit reduces as shown in the graph. It is not due to the reason that all stocks would equally.

Concentrating the portfolio makes the portfolio more manageable and easily track able. Continuous tracking would protect the investor from negative surprises in her portfolio as she would be able to spend more time studying each stock in her portfolio.

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Impact of changes in the balance sheet presentation format on financial ratios

Sir,

Thanks for the quick reply to my previous query. Today I have another query. For Vinati Organics Limited, Balance sheet figure, when I check the screener.in site in the year 2014 the total equity is Rs. 310.07 cr. However the debt is shown as borrowings Rs. 161.78 cr and other liabilities Rs 80.93 cr, taking the total debt to equity as (161.78+80.93)/310.07 = 0.78.

However, Sir, as per your calculation the secured Loans are Rs. 88 cr. and unsecured loans Rs. 34 cr making the D/E ratio 0.4.

I am new to these financial ratios. I am trying to learn. My query is how you have arrived at debt figure of Rs. 122 cr. in FY 2014 whereas screener.in shows it to be Rs. 242.51 cr.

I will truly appreciate your explaining the point behind this.

Regards,

Author’s Response:

Hi,

Thanks for writing to me!

In August 2015, the screener website has undergone a change and it has changed the way it presents/classifies the data on its website.

From 2012, the presentation of financial statements had undergone a change on account of change in Schedule VI. From August 2015, screener has updated its data presentation and has factored in the changes in presentation of financial statements from FY2012 onwards. Before August 2015, it seems to be calculating data as per its template which was prepared in the older format of annual reports.

The data presented in the article was taken from screener in December 2014. The changed presentation of data by screener is the reason that you are not able to find debt data of March 2014 as ₹121cr.

If you read Vinati Organics annual report for FY2014 page no. 42, then you would notice that at March 31, 2014, Vinati had shown long term debt of ₹109.9 cr. and short term debt of ₹12.26cr. cumulating to total debt of ₹121cr shown by screener in its previous template and thereby used in the article above. However, the actual data of total debt at March 31, 2014 should also include the current maturity of long term debt of ₹39.34 cr. shown in the annual report at page no. 52 in schedule 8 “other current liabilities. Therefore the actual total debt is 109.9 + 12.26 + 39.34 = 161.5 cr.

Read: Understanding the Annual Report Of A Company

Other liabilities include provisions, customer advances, dividends to be paid etc., which are usually not factored as debt in debt to equity ratio.

An investor would notice that the presentation of data in annual reports keeps on changing over time and there is a time lag with which public sources of data adjust to the new format. As in the current case, it took a lot of time for screener to adjust its template to new debt presentation format of annual report.

Therefore, it is advised that before taking any investment decision, an investor should check the financial figures from the annual report of the company as annual report is the most authentic sources of data.

Hope it clarifies your query!

Regards,

Vijay

 

Sources of financial data for companies

Hello Vijay,

Thank you again. I can say I am very lucky to found your blog. I have a question again!

Nowadays, screener.in is not up to date, values are sometimes wrong. So, could you please share with me if you know any similar websites to refer 10 years data other than money control and NSE?

As per your guidance I have created my won excel sheet for analysis the last 10 year data, I almost complete the excel, but I don’t know where to find the average price of the share to calculate each year P/E and PEG ratio so please advise me.

Thank you again for your support.

Author’s Response:

Hi,

Thanks for writing to me!

Congratulations that you have prepared your own excel file and have started to do own analysis. I am happy to hear about it.

Screener & money control are the two most used data sources. Beyond them, I guess one should take data directly from the annual report of the companies.

You may get past data of share price from both NSE and BSE websites, which you may use to calculate the ratios.

All the best for your investing journey!

Regards,

Vijay

 

How to receive dividends on shares

Hello Vijay,

If I hold some shares and want to receive dividend on it then what is the procedure to receive it and to whom should I intimate?

Author’s Response:

Hi,

Thanks for writing to me!

An investor does not need to intimate anyone. If she owns shares in her demat account on the record date i.e. she has bought it before the ex-date, then the company would automatically deposit the dividend in her linked bank account on its own. Dividends are usually deposited within 3-4 weeks after the record date declared by the company.

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 except Vinati Organics, in my portfolio.

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