Q&A: Predicting Performance, Tracking Portfolio Performance, CF

Modified on July 22, 2018

The current article in this series provides responses related to:

  • Predicting future performance
  • Making investment decisions amid uncertainties
  • Tracking portfolio performance
  • Cash flow statement

 

Query 

Hi Dr.

I am grateful for the help that you are providing to the community, hopefully, I will be able to repay this by providing a good stock idea to you 🙂 Currently, I have a couple of queries.

I am currently studying a ₹50cr Mcap company, which is available at ~19 PE but has a good margin of safety (MOS) built in the business. However, the only concern is if the business will continue to grow in the future or not. Recent years growth has slowed down though the market capitalization (Mcap) has been almost 3X due to the bull market.

Questions are:

  1. How do we know if the company will continue to grow, especially when it’s a small cap? Overall market size 1800 cr. Last 10 yrs growth 11% recent 3 yrs 5%.
  2. Related to above rest all the parameters have improved. How do I assess whether the company is at its peak and the only way in future is only flat or downhill?
  3. The company has almost no debt so no rating though it operates in Textile industry.

I will share a detailed analysis with you in case I get convinced about the future prospect.

Looking forward to your response.

Regards,

Author’s Response:

Hi,

Thanks for writing to us! We are happy that you found the articles useful!

We notice that your queries primarily relate to the predicting future business performance and couple it with future stock price performance.

We do not believe that we can predict the future in such situations. We do not know whether any company would show higher revenue or lower revenue next year. Similarly, we do not know whether the parameters would improve or deteriorate going ahead.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

In our assessment, we invest in companies, which have profitable growth, are generating free cash flows after meeting their capex requirements and are conservatively financed. Whenever we find such a company and believe that it is run by a competent and shareholder friendly management, then we invest in such companies for the long term. This has been our investment approach.

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

We believe that a competent management should take the business to greater heights in future.

Simultaneously, the presence of a margin of safety (high SSGR and positive FCF) should help us tide over tough economic periods. Both these factors should help the business to grow in future and in turn create wealth for shareholders.

Read: 3 Simple Ways to Find Out Margin of Safety in a Stock

However, when or whether this would actually happen is anybody’s guess. This requires faith in the management and that’s what we do as minority shareholders.

Hope it clarifies our approach to you.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

A couple of queries:

  1. Screener and BSE/NSE and company websites are the best free resources. Do you use any other free sources to supplement primary research?
  2. Also, Is it possible to find any company which ticks off all parameters and is also available cheap? There is always something or the other missing from any prospective investment. Taking decision becomes difficult, how to go ahead mentally?

Author’s Response:

Hi,

Thanks for writing to us.

1) Screener and BSE/NSE and company websites are the best free resources. Do you use any other free sources to supplement primary research?

In addition to the websites mentioned by you, we use Moneycontrol and Researchbytes intermittently.

2) Also, Is it possible to find any company which ticks off all parameters and is also available cheap? There is always something or the other missing from any prospective investment. Taking decision becomes difficult, how to go ahead mentally?

We have been continuously investing in the markets in the stocks that we find are good and cheaply available. Our transactions are available to premium subscribers.

If an investor finds that any stock, which she likes is doing well on many of her favourite parameters, then she may make a tradeoff. This might be a case where the investor would be entering an investor while being conscious of the issues being faced by the company. Known issues are better than unknown issues as the chances of negative surprises are low and the investors tone down their expectations accordingly.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query 

Dear Vijay,

Can you share how do you track your portfolio performance because with buy/sell transactions at different times, more cash infusion in the portfolio, dividends etc., I am not sure if I am using excel formula correctly to calculate CAGR on investment?

It will be great if you can share your view on how to calculate portfolio returns or any excel template for the same.

Also how to include the dividend paid by the company?

Author’s Response:

Hi,

Thanks for writing to us!

We use valueresearchonline for keeping track of our portfolio performance. We manually update each our portfolio transactions at Value research as and when we do such transactions. Value research shows us life till date CAGR of entire portfolio as well as individual stocks.

However, the yearly & cumulative CAGR data, which we put in our portfolio performance has been calculated by exporting the transactions from valueresearchonline.com into a Microsoft Excel file and using XIRR function.

The portfolio tracker at value research gives auto notification when any dividend is due on the stocks in the portfolio. One can then update the same in 2-3 clicks of the mouse and the dividend transaction gets added in the overall transactions of the portfolio and the updated returns reflect the impact of dividend as well.

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

In cash flow, many times we notice that the difference between cash flow from operation from cash from investing is getting tallied or it is being met from cash flow from financing. Does it mean that the company is using all the cash from operation for investments?

Author’s Response:

Hi,

Thanks for writing to us!

The money is fungible, which means that it might be that finance is being used for investments and operations are being used partly for investment and partly to repay the finance.

Or both operations and finance are being used for investments.

But overall, if CFO inflow and CFF inflow are equal to CFI outflow that would mean that CFI requirements are being met through using both CFO and CFF.

Read: How to do Financial Analysis of Companies

Hope it answers your concerns.

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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