Q&A: Tax Expense, Debt to Equity Ratio, Analyst Meets

Modified on July 10, 2018

The current article in this series provides responses related to:

  • Using tax payouts: from P&L or from CFO
  • Preferred level of debt to equity ratio
  • Analyst/investor’s meetings or conference calls, listing on stock exchanges
  • Sequence of reading annual reports

 

Query

Hi Dr Vijay,

While doing the tax analysis don’t you think it’s more accurate if we compare the actual tax paid (the figure in cash flow statement) as a percentage of PBT over the years rather than taking the tax paid figure from P&L.

Regards,

Author’s Response:

Hi,

Thanks for writing to me!

P&L and cash flow statement differ many times from each other on account of the timing of the receipt or payment of cash being different from the time when the revenue or expense become certain for recognition. This marks the basis of accrual based accounting.

Like many other revenue and expense items, in the case of taxes as well, the timing of the tax being shown as payable in P&L and the tax being actually paid are different. Such instances give rise to deferred tax assets (DTA) & liabilities (DTL).

If an investor wants to use cash flow statement based tax outflow instead of P&L tax expense, then she should use it for the entire 10-year history of the financial data, which is usually used in fundamental analysis. This is because there might be years in the past where P&L tax expense was high and cash flow tax outflow was low. This would have led to the formation of DTL. In subsequent years, when the company paid the tax liability to income tax dept., it might be the case that in this year P&L tax expense might be lower than cash flow tax outflow.

If the investor uses P&L tax expense for previous years and uses the cash flow based tax outflow for the recent year, then she would be over-estimating the tax liability by double counting a single tax liability.

Read: How to do Financial Analysis of Companies

However, as an additional financial analysis parameter, it is advised that an investor should compare the total P&L tax expense for 10 years with the total tax outflow as per cash flow statement. Ideally, they should be similar to each other. In case, these two items are not similar, then the investor should analyse it in detail.

Hope it clarifies your queries!

All the best for your investing journey!

Regards,

Dr Vijay Malik,

 

Query

Vijay Sir,

Why do you think the Debt to Equity ratio should be less than 50%? If the company gets the long term loan on the cheapest rate, it would be beneficial for the company to finance its long-term projects. Financing the projects with borrowed money than Equity is not expensive for the company?

Author’s Response:

Hi,

Thanks for writing to me!

The stock investing approach along with the preferred investing parameters differ from one investor to another. A market is a place where different investors with different investing approaches meet, which results in a trade with two investors taking opposite decisions (buy & sell) with the same information available to them.

I prefer to invest in companies, which have as low debt as possible, preferably debt free. An investor would appreciate that if the debt is taken, then a fixed liability of making interest and principal repayments falls upon the company, which needs to be met irrespective of the business/company performance. Many times, such liabilities lead to the companies selling their assets in tough times and in infrequent situations, companies face bankruptcy as well.

Moreover, the probability of manipulating books to show good performance increases, when the company has debt on its books and it needs to meet the performance conditions stipulated by lenders.

All these factors become almost irrelevant, though not non-existent, when a company does not have any debt on its books, which lends stability to the business approach as well as peace to the investor.

Read: How to do Financial Analysis of Companies

However, as mentioned above, the investing approach is unique to each investor. Therefore, in case any investor believes that any company, despite having high debt, is being run by good management that would use the additional funds in a very good manner and this level of debt would not pose any risk to the company and the investors, then she may go ahead with her conviction.

Read: Choosing the Stock Picking Approach Suitable to You

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Dr Vijay Malik

 

Query

Dear Dr Vijay Malik,

One of my friends told me about you and introduced your site to me.  I have just started reading your articles on analysis and Q&A articles, and getting a different perspective on Stock Market and Shares.  I am not a big or full-time investor, very novice and till now I was not having any idea about value investing and also did not have any ownership feeling of any of the companies for which I bought stocks.  Now I feel how important it is to have the ownership feeling on any of the companies whose stocks I am going to buy.  Also got the importance of Fundamental Analysis that need to be done before buying stocks.  After reading your articles I understood that how I had been misled all these days by market emotions, media and other sources.  I am a very novice to the Stock Market, I have few basic questions on Stock Market.  It would be great if you could answer these queries or you can direct me to a right source where I could find the answers:

  1. What will be discussed (or agenda) in the Analyst/Institutional Investors Meeting? And normally who are the participants of this meeting?
  2. How often the Analyst/Institutional Investors meeting happens in a year
  3. Can everyone have access to the Minutes or the Summary of the outcome of Institutional Investors meeting? If so, where can we get it?
  4. Why some of the stocks are listed only on NSE or BSE.
  5. What is the rationale or why companies prefer being listed in only one of the Stock Exchanges, not on both?

I will continue to read your articles whenever I find time.  Also started reading the book: “Intelligent Investor”

Thanks in Advance.

Best regards,

Author’s Response:

Dear,

Thanks for writing to me! I am happy that you found the article useful. It’s great that you are working towards doing your own stock analysis and also have started reading “Intelligent Investor“. It is a great book and you will find it very helpful to develop the right attitude for a stock investor.

1. What will be discussed (or agenda) in the Analyst/Institutional Investors Meeting?  And normally who are the participants of this meeting?

Analyst/institutional meetings usually focus on the results & business performance updates about the companies as well as all the latest developments about the company and their impacts on company’s business. From the company, mainly CEO/Chairman, CFO, company secretary/investor relationship person etc. i.e. key senior management personnel, are usual participants. However, many times the senior management also brings other key people like marketing head etc. to the Analyst meeting. From participants’ side, usually, the investment analysts from stock brokerage firms, mutual funds, institutional investors are the participants. However, individual investors like us also attend these meetings especially, when they are held by way of telephonic conference calls.

2. How often the Analyst/Institutional Investors meeting happens in a year

These meetings usually happen each quarter or whenever any major development related to the company, which is expected to have a material impact on the company, takes place.

3. Can everyone have access to the Minutes or the Summary of the outcome of Institutional Investors meeting?  If so, where can we get it?

Analyst meetings/conference call minutes/transcripts are available on websites like researchbytes.com. However, the minutes of the closed-door institutional investors meetings, which happen one on one between the company and potential investors are not disclosed in the public domain.

4. Why some of the stocks are listed only on NSE or BSE.

5. What is the rationale or why companies prefer being listed in only one of the Stock Exchanges, not on both?

BSE has much more companies listed on it than NSE. As a result, many companies are listed exclusively on BSE and there might be only a few companies, which are listed only on NSE. Reasons can be many:

A company might have got listed on BSE when NSE was not established (NSE was established in 1992. And the might not have felt the need of getting an additional listing on NSE later on.

Costs associated with listing on additional exchange might be a factor

However, now a days, many companies, which have been listed on BSE for many years are getting listed on NSE as well. Also, most of the new listings/IPO are listed on both NSE and BSE simultaneously, therefore, the trend of being listed only on one exchange seems to be on a decline.

Hope it clarifies your queries!

All the best for your investing journey!

Regards,

Dr Vijay Malik

  

Query

Dear Vijay

In what order do you recommend reading the ARs? The latest from older or older to the latest?

Thanks

Author’s Response:

Hi,

Thanks for writing to me!

An investor may read the latest annual report first to judge whether it is worth spending further time on the company. Once the investor has decided to analyse the company in depth, then it is advisable to read the annual reports starting from the last year and then keep reading the annual reports of later years on a sequential basis.

Read: Understanding the Annual Report of a Company

Hope it clarifies your queries!

All the best for your investing journey!

Regards,

Dr Vijay Malik

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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