Investing Basics - Feel free to ask the most basic questions

(Gothamcapital) #442

Look at it this way,you are a young entrepreneur who wants to start his own company.Let us say u start the company with some cash of 10 crore.You will buy plant and equipment (which are fixed assets) and inventories and also put some cash in the bank for liquidity as well as have to accommodate people who buy on credit.So your 10 crore is the amount you invest in the company.Obviously you want to make back the 10 crore as fast as possible,so you want to make a good percentage of your invested amount back every year.If you make 10 crore profit in the first year ,you have basically made your money back and you have earned a 100 percent return on equity.On the other hand if you have made 5 crore ,then you have earned 50 percent ROE and you will make back your money in two years,If you earn 2 crore ,your ROE is 20 percent and you will earn back investment in 5 years.And if you make 50 lakh a year then the ROE is 5 percent.ROE is also important because often ROE may also tell you the extra profit you might earn if you invested more in the company.i.e,let us say your company has a 20 percent ROE and you invested 5 crore more,then the extra profit because of these new assets will be 20 percent of 5 = 1 crore(Here i have assumed no debt and also ignored time value of money)
So basically ROE is a measure of how quickly you are making the money invested in the assets back.If your ROE is not greater than say 8 percent then the 10 crores should have been put in a bank as clearly a bank would give you a higher return,

On the other hand,market cap is the cost of buying the company,i.e the amount you will have to pay to become the owner of the company’s assets and liabilities.Obviously the market cap has to be as small as possible as you dont want to pay a lot and also make back the monies as fast as possible here too.

(Dinesh Sairam) #443

Price Yield is also used by some people. But the general notion is that the Market Cap is incorrect. In fact, an investor would make wonderful returns only if the current Market Cap is incorrect. However, the Book Value hardly changes and so, makes for a better input in a Ratio.

So yes, the ROE is not the best Ratio to look at, but it gets by. I personally look at Cash related Ratios like the CROCI.

(Rohit) #444

Hi , one basic query , I wants to calculate the returns which were generated by my portfolio since when I started investing my money in market(from April 2011 - till date). I took the trade log (all buy and sell trades till now , and the current portfolio value (assuming all the holdings sold at today’s date)) and applied XIRR function to calculate the internal rate of return (since all trades are done on different dates , so absolute return do not gives a clear picture.). Calculated IRR Value comes around 22%. Just wanted to know if my method is correct ? If yes , is it a acceptable value for a individual investor ?

(Dinesh Sairam) #445

Yes. XIRR is the only accurate way to calculate portfolio CAGR. And yes. The indices in India return close to 14-15% in the very long term. So, a +7% CAGR is amazing.

(shreys) #446

That’s correct. Your outperformance, is without a doubt, worthy of applaud. But, if I may be so bold as to say, that returns will likely moderate once markets turn bearish. A lot of profits will vaporise unless you stay completely out of the market,which in my opinion, is imprudent.
Yet again, hearty congratulations for your fine performance.

(Rohit) #447

@shreys , @dineshssairam

Thank you for clarification. I have learned a lot from this forum and still learning. Some v good threads which I studied here have helped me a lot. This forum is goldmine of knowledge.

(peeksden) #448
  • Is Growth investing so attractive to get high P/E & massive rallies on results ?
    We have seen stock market reward companies showing QoQ growth in Growing markets disproportionately compared to deep value stock having assured returns even if company is liquidated. There are many experienced investors who say if company is growing in a growing sector they will accept disproportionately high P/E. Company showing great growth but then miss one quarter is bashed like anything.

I think this encourage Managements/Promoters to fudge numbers. Burn reserves, capital and suppliers to show as targeted revenues and profits.

([email protected]) #449

I had posted this in KCP thread, felt this should get posted here.
I was looking at the Accounts receivables for KCP, the intention was to understand a balance sheet.

imageimage.jpg1430x212 81.9 KB
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Looks like the receivable days = (7314/152952)*365 = 17 days

Wanted to know if my calculation is correct and if yes is this the general norm in the industry in which KCP operates, as I have seen few AR’s spanning across to 130+ days and was impressed with the KCP AR days

Please enlighten with your valuable views.

(Gothamcapital) #450

Your calculation is right for the overall company.Again we do not know the receivables per segment as those details are not given.It is likely that the majority cement business still has very low receivable days.The receivable days depend on industry,for example pure retail companies (without any middle man)like TBZ will have zero receivable days.In case of pure cement companies shree cement has a receivable days of 90 ,ramco has 98 days receivables,dalmia bharat has 78 days and acc has 58 days.Something is going on in this company,which is why the receivable days are lower than its peers.This is definitely an advantage.

([email protected]) #451

Thanks @Gothamcapital for your inputs, much appreciated.

Can I also ask you one more question.
Along with the AR what are the other parameters that needs to be looked while evaluating AR.
I believe having a good AR of 17 days in isolation may not be the right way to look at.

(Gothamcapital) #452

If you are analyzing trade receivables,look for the reason why the trade receivables are so low.Trade receivable days being low means the company has a strict credit policy,however this doesn’t mean much if it does not translate into a higher ROE.In the case of kcp the roe has been quite low,which means that the company is not really earning a decent return on its investments.

([email protected]) #453

Thanks @Gothamcapital for your insights.

(Rohit) #456

This is a million dollar question. No one can answer this with 100% accuracy. You need to learn Investing and take calculated risks. Their are no free lunches in life. Better invest in mutual funds to get decent returns till the time you learn and able to invest yourself…

(Rohit) #457

I have one question. Which business is considered better between life insurance and general insurance over the long term ?

I have smaller allocation in ICICI pru life and HDFC life and higher allocation in ICICI lombard. Would like to switch the money into better business and can keep for long term (10+ years )

(Akash Padhiyar) #458

Came across interesting data:
General perception:
1.In general fed rate hikes impacts negatively to Indian market as money flow goes to outside say US
2. Rupee weakens & every import(major crude) becomes costly…

What history says:
History says that during the fed rate hike cycle indian market witnessed Bull run for example 2005 to 2007 and when fed rate start decreasing market crashed say from 2008…

Any financial expert can explain this contradiction? It will be much appreciated

(SMondal15) #459

Rohit…My personal view …keeping in mind current situation in India…I think its life insurance is bit attractive .My points are below…
1.The more granular the business is more better its for both life and General business. Clear shift from both Group health to retail health business in industry. Pvt general and pvt life insurance companies are not at all interested on group business considering the capability of charging increasing premium.Having said that HDFC life has considerable interest in group business.
2. Third Party is still drag on Motor insurance.Insurance company still not free to decide the premium.Motor alone is 35-40% of the general business.
3. General insurance cos have gr8 risk in writing corp insurance.On paper its a huge opportunity but political risk is also huge.Lombard is very cautious. Not sure how Sanjiv Bajaj at Finserv is managing such growth in corp insurance.
4. Credit life policy with strong bank/NBFC backup can be a huge boost to pvt sector life company.
5. Overall digital selling has a good and lasting effect on life along with new-age Ulip product.

Overall the collect now- pay latter business model is very good for long term when underwriting quality is good.

(SOHAN) #460

Hello all my friends. I like to buy companies with sales between 100 to 300 cores and netprofit between 5cr to 20 CR which have high does and dividends with niche products.if I had done any mistake how can I exit a particular stock any technical indicators or quarterly results updates etc please help

(Dinesh Sairam) #461

About you first question, see if this is what you’re looking for:

(sarthak kumar) #462

Would it be OK to add a lump sum amount into selected stocks at this elevated value of Nifty PE or should I be waiting for a lower PE on the Nifty. The problem is that I have been waiting for a long time :slight_smile:


(Dinesh Sairam) #463

I don’t think NIFTY PE levels should bother an individual investor. What should bother you is when you can see an increasingly higher number of companies trading at steep valuations.

How you figure that out is up to you. Some people use the PER, some use Moving Averages. I personally use DCF to value a lot of companies regularly, so I can tell when things are getting expensive. Right now, I think they are.

However, if you largely invest in the index (NIFTY, SENSEX) or very similar Blue Chip companies, you shouldn’t try to time the markets. Here’s why: