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(Raj A A) #401

Primer on Working Capital for New Investors from Non Accounting background

Why a company’s working capital matters for investors

Efficient management of working capital by a company is vital for maintaining its solvency and liquidity.

by Sameer Bhardwaj

Working capital is an impotant metric to evaluate a company’s health. This is because even profitable companies can turn bankrupt if they fail to manage their working capital properly. Working capital determines the resources that are needed for running day to day operations of a business. It is an accounting term that shows the short term liquidity position of a company at a point in time.

Working capital is defined as the difference between current assets and current liabilities and includes the receipts and payments that have a tenure of less than one year. Current assets includes the company’s unsold goods (inventory), amount due from customers who have purchased goods on credit (accounts receivable or debtors) and the amount of cash available with the company. On the other hand, current liabilities include short-term debt, amount of goods purchased by a company on credit (accounts payable or creditors), bank overdrafts and other short-term obligations.

The working capital of a company should be positive. Companies with negative working capital (current liabilities more than current assets) are prone to financial risk and should be thoroughly evaluated. Nature and size of business, seasonal variations in sales, change in input or raw material prices and length of production cycle are a few factors that influence the working capital requirements of a company.

Financial ratios like working capital turnover, current ratio and quick ratio prove very effective in judging the liquidity position of a company.

Working capital turnover is calculated by dividing sales by the working capital. Generally, higher the ratio, the better it is. It shows how much sales a company has made for every rupee of working capital employed. On the other hand, current ratio is simply the ratio between the current assets and current liabilities. Current ratio greater than one is desirable because it implies that the company has more current assets than its current liabilities.

Another modified version of current ratio is the quick ratio.

Also known as acid test ratio, it includes most liquid assets in the numerator. Such assets are cash, marketable securities and accounts receivables. Basically, quick ratio excludes inventory from the current assets as it is considered illiquid.

We tried to identify companies that have displayed working capital efficiency by considering consolidated data for the past five financial years, starting from the year 2013-14. Over 890 companies with market cap greater than ₹500 crore were picked. We filtered out companies that have the highest working capital turnover, current ratio and quick ratio in 2017-18 compared to the previous four financial years. Also, an additional filter is applied to identify companies with current ratio greater than one in the year 2017-18. Only 19 companies passed these comprehensive filters.

Let us look at the five companies out of the 19 shortlisted companies that have decent buy recommendations and highest one-year upside potential as per the Bloomberg consensus estimates:

Amber Enterprises

A solution provider for air-conditioner original equipment manufacturer and design industry, engaged in room air-conditioners (RAC) and related components. According to a latest report by Sbicap Securities, low penetration in the RAC segment, higher wallet share for original design manufacturers and market share gain indicate strong growth prospects for the company in the medium term.

Colgate-Palmolive (India)

The company is engaged in personal and oral care business and offers products like soaps and cosmetics. JP Morgan is bullish on the stock due to expectations of volume growth revival, improving market share, healthy margin profile, free cash flow generation and improved dividend payout.

Graphite India

It is a manufacturer of graphite electrodes and carbon and graphite specialty products. Analysts believe that high prices for graphite electrodes and healthy operating environment will prove beneficial for the company. Moreover, growing demand for environment friendly electric arc furnace (EAF) due to stringent environmental norms in China are likely to create strong demand for electrodes.

The India Cements

A cement manufacturing company with market leadership in South India. Analysts expect demand revival in South India, cost rationalisation, improving plant efficiency and up-tick in realisation, which will all be significant growth drivers going forward. Moreover, cement demand is likely to grow on account of the government spending on low cost housing projects.

VRL Logistics

The company is engaged in goods and passenger transportation. Being one of the largest organised players in the industry, it has been a key beneficiary of GST. Analysts are closely monitoring the stock due to fuel related challenges that the company is witnessing. Revival in profitability will depend on the future fuel price trends and VRL’s ability to pass on the rising costs to consumers.

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(vikas kukreja) #402

I think this point needs a rethink and should be seen in the right perspective. Many dominant companies such as Maruti Suzuki, ITC, VST Industries, Bajaj Auto, Hero Moto Corp etc have negative working capital precisely coz these have a substantial business dominant position. Hence negative working capital in isolation can’t be judged upon.


(Raj A A) #403

Compilation of Important Industries outlook. Courtesy Abhishek Murarka (Twitter handle @abhymurarka), @alphainvesco

Thank you guys for the great work.

https://drive.google.com/file/d/0B6nLJ1dXdrjgUmtxYVZkTHJWUndYeHU5dTQ4VTR1LWVnOXBV/view


(ranvir dehal) #404

CHART SHOWING FUND FLOWS IN DEBT AND LIQUID MFs OVER LAST MONTH

GREAT FOR HDFC AMC SHAREHOLDERS


(ranvir dehal) #405

FOR PARTIES INTERESTED IN AUTO SECTOR

DISC: have bajaj auto in my portfolio


(ranvir dehal) #407

MR ADITYA PURI’S VIEWS ON INDIAN MACROS AND HDFC BANK IN PARTICULAR.

WORTH PAYING ATTENTION TO…I MUST SAY.


(Amit) #408

Great timeline of how things progress in America Post world war 2 till now…Amazing blog by Morgan Housel.


(Amit) #409

China $33.9 trn retail transactions, $12.2 trn economy. Cash & Cheque @6% of GDP
India $2.6 trn retail transaction $2.6 trn economy Cash & Cheque at 14% of GDP. Huge opportunity to go digital.IMG_20181119_224930


(Mahendra243) #410

It mean Indian’s are less tilted to taking big debts to purchase consumables?


(Abhishek Basumallick) #411

A breakthrough, if it happens, that has very large consequences to humans. Xenotransplantation using genetically modified pigs for organ "farming" can be a life saver for people.

After years of setbacks, the past two years have seen a cascade of record-breaking xenotransplants using primate models, and researchers are working with regulators to prepare for clinical trials with humans. The first pig-to-human skin graft using live cells is set to take place this month in Boston. At the same time, Tector is readying a clinical trial in which he will install his triple-knockout pigs’ kidneys in dialysis patients who are unlikely to be considered for human-donor organs.

A critical review of "All is well" book factfulness by Hans Rosling. This article argues that Rosling only cherry picked the "good" data and left the difficult and bad data out of his study to present a rosy picture of the world.

Apple is increasingly "milking" its captive user base to sell services and is unable to sell more gadgets.

https://www.bloomberg.com/opinion/articles/2018-11-02/apple-s-business-is-about-services-more-than-new-iphones-now

A wonderful collection of pictures to remind us how smartphones have become all pervasive in our lives.

An article on Shane Parrish, who runs the best blog in the world, in my opinion, and how he got to doing this.

An interesting article on how labour reforms, specifically wage reform, can improve the capitalist system.

https://www.bloomberg.com/view/articles/2018-07-25/states-should-ban-contracts-barring-workers-from-joining-rivals


(mylu) #412

#413

Samit Vartak on valuations and opportunities


(saumya) #414

(aerofire) #416

Chai, Vada Pav & Markets with value investors Mohnish Pabrai & Guy Spier


(Vivek Mashrani, CFA) #417

A good compilation of investing related blogs, articles, podcasts, books etc.


(Devaki Nandan Tripathy) #419

Wonderful interview of trading legend Mark Douglas, analysing investor psychology and money management. Generally I prefer books to videos, but this is an exception.


(ranvir dehal) #421

One of the headline article in today’s edition of Economic Times. A very interesting read …for anyone interested in 2,3 or 4 wheeler stocks.


(Abhishek Basumallick) #422

This is one of the best article’s I have read this year. So many wow moments in this. Here are some excerpts:

When a supernova explodes, the blast wave creates high-energy particles that scatter in every direction; scientists believe there is a minute chance that one of the errant particles, known as a cosmic ray, can hit a computer chip on Earth, flipping a 0 to a 1. The world’s most robust computer systems, at NASA, financial firms, and the like, used special hardware that could tolerate single bit-flips. But Google, which was still operating like a startup, bought cheaper computers that lacked that feature.

They were relentless optimizers. When a car goes around a turn, more ground must be covered by the outside wheels; likewise, the outer edge of a spinning hard disk moves faster than the inner one. Google had moved the most frequently accessed data to the outside, so that bits could flow faster under the read-head, but had left the inner half empty; Jeff and Sanjay used the space to store preprocessed data for common search queries.

A list of the best scientific innovations of 2018. A fascinating peak into where we as humans are going. Things like Iron-Man jet suit, indoor smart garden, shape-shifting vehicle wheels and the world’s first migraine prevention drug make the list interesting and entertaining.

New technology is the key reason for today’s high equity valuations, he said: “It’s created this vision of a world for all of us where we can have high growth and no inflation forever.” But the United States has had many periods of technological change since the late 1800s and none ever produced permanent high growth and low inflation.

So China will abandon its link to the dollar. “It’s just not conceivable that the second-biggest economy in the world would take its monetary policy from Washington, DC,” Napier said. He expects an initial devaluation, then a free-floating RMB that allows China to inflate away its debt. And when the currency relationship ends, so will the nirvana of high US growth, low inflation, and high equity valuations.

https://blogs.cfainstitute.org/investor/2018/12/06/russell-napier-equity-markets-and-structural-change/

A fascinating article on how Sweden has managed to be great at creating new start-ups in business and the changes it has put in place over the last 30 years to get where it is today.

How can 2018 be complete without something about graphite :wink:

Over the next five years, demand for graphite electrodes is expected to outstrip supply, keeping prices high. (Capacity is expected to grow by 8 percent annually, but demand should grow by 12 percent.) “We see this uplift as structural,” noted Sumangal Nevatia in a Macquarie Research report in June. “With no substitute, growing demand and limited new supply, graphite electrodes are now more a ‘strategic resource’ than a ­‘commodity.’ ”


(Devaki Nandan Tripathy) #423

A glimpse of the future in the war between EV and ICE?

https://cleantechnica.com/2018/12/08/tesla-model-3-completely-crushing-us-luxury-car-competition-10-cleantechnica-charts/