Can we Predict Future Performance of a Company?

Modified: 08-Jun-21

The current article in this series provides responses related to the following queries:

  • De we use future projections in our analysis?
  • How do we know if a company will continue to grow
  • Can we predict the future market cap of a company?
  • Can we estimate the performance of the coming quarter for a company?
  • Estimating future sales growth from capital expenditure

Do we use financial projections in our analysis?

Hi Sir,

I am following your blogs which is very useful in to gain the knowledge in fundamental analysis, but you haven’t use the financial projection of financial data of the company, so is it not useful to select the stock in the right time?

Author’s Response:

Hi,

Thanks for writing to me!

We do not rely on future projections. We believe in associating myself with sound management running a fundamentally good company and riding the investing journey with them. We try not to project earnings 5-10 years down the road. Therefore, we do not use any parameter for analysis based on future values.

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

However, we believe that it is a personal choice of the investors to use any parameter she is comfortable. Therefore, if an investor believes that she can predict with reasonable certainty, the future, then she can always use future values for analysis. After all, it’s her own money and she is free to invest it as per her choice. As is said, many roads lead to Rome.

All the best for your investing journey!

Regards,

Vijay

How do we know if a company will continue to grow

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 the 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 the 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 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 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 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

How to make earnings projection and identify companies before others?

Dear Sir,

Could you help us in the following situation?

Sometimes we find a good strong company with all strong and consistent ratios and available on good value buying. But how should we forecast the company earning?

The second question is related to star investors.

How do they find before the general public that this company is going to well (example Vijay Kedia sir recent bought in Vaibhav Global)? If we see the previous performance there is no consistency. How can we develop this thought process?

Thank sir. This will help us if you could explain to us.

Thank You

Author’s Response:

Hi,

Thanks for writing to us!

1) We do not project earnings of companies in future. We believe that the companies which have shown fundamentally sound growth in the past and are being run by competent and shareholder-friendly management, these companies have a higher probability of producing good earnings growth in future. Therefore, we analyse past performance of companies and take our investment decisions.

Further advised reading: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

2) Each investor has her own stock selection style. However, if someone wants to find companies before the market gets to know about them, then she would have to look for the companies beyond newspaper headlines. The screener is a good source to find such companies.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Can we predict the future market cap of a company?

Dr. Malik,

How can we analyse if the current market cap of a company as on date is x? Will it grow to 5x? E.g. – Godrej Agrovet is ₹12,400 cr approx. today. Can it be ₹50,000 crores in 5 years’ time?

Author’s Response:

Hi,

Thanks for writing to us!

We do not know any method to predict the future market cap of any company. We can only find out whether a company is fundamentally sound by following the below-mentioned steps and then hope that the market will increase its market cap in future:

Advised Reading: Selecting Top Stocks to Buy – A Step-by-Step Process of Finding Multibagger Stocks

We do not believe that it can be said with certainty that the market cap will increase for sure in future for any stock. It may or it may not. Even if it increases in future, then there is no certainty with the pace at which it may increase in future.

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

Can we estimate the performance of the coming quarter for a company?

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 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

Estimating future sales growth from capital expenditure

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

P.S.

Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.

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