Investing Basics - Feel free to ask the most basic questions

(jstocks) #144

Thanks for your response, highly appreciate it.

I have a few questions related to your reply.

You said that item #28 for R&D might be included in "Other expenses" but when I look at "notes to accounts" there is a separate entry for "other expenses" under line item #27 which is around 86K million and R&D expenses which is under line item #28 is 21K million. This figure of 21K cannot be found anywhere in the expenses section of the consolidated P&L statement. Hope you can throw some light on this.

Also regarding insider trading, I know that it is illegal but what I find surprising is that how come people are able to discern from technical patterns that there might an opportunity in the stocks when there is no indication in their fundamentals which suggests so.

(The Confused Consultant) #145

Oh ok, Sun Pharma. Apologies, overlooked a pharma company.

The 21K you are mentioning is not an accounting head but management information on R&D spend which has gone to different accounting heads as salary, legal etc. So you wont be able to reconcile with PL as such. Take this way, if a doctor is engaged in R&D his salary would have been debited first to salary account and then subsequently stripped off to R&D. Now salary appears as accounting head in PL. Is this what you are looking for?
But if you want to understand fully R&D then do not ignore intangible asset. Read together both, successful trials would have capitalised as intangible asset. Check their accounting policy. Let me know if you have difficulties.
Insider trading refers to a person knowing confidential information in advance and take advantage of the information financially. For example before result published one knows the result.
Technical foot print throws up vital information on crowd behavior , a symmetry of price, volume and time. If an insider trading is significant it should show up in both price and volume. Buying without a price action or volume action does not convince me even if it's insider trading. I don't want to be the first in party, rather prefer to join after 30 minutes.

By the way no one has made money from insider trading. Gurus have been advising for centuries, let us focus on what we can control.:slightly_smiling_face:

(ravish) #146

Thank you for reply. Your answer is making sense to me somehow. but one more point i want to ask that
:smile: How it can affect positively or negatively on the company's finances and can this change in inventory, may be a trend like negative inventory for past many quarters put some light on the future business picture for that particular company?

(The Confused Consultant) #147

Just wrote a piece on Efficiency which includes good deal of inventory turnover.

Also let me put another line which may help in your understanding:

When sale is made product is moved from INVENTORY (BS) to Cost of goods sold in PL

Change in inventory is a resultant number, it cant be either positive or negative forever. For a long period if inventory is decreasing that would mean either company has a huge pile up or producing more than required. You have to read in conjunction with a. inventory b. purchase c. stores and spares d. in progress inventories.

Now if you carry a lot of inventory you would land up incurring high storage and carrying costs. In addition to funds that have been used to acquire those inventories. If funds are on debt like a working capital loan it will eat up your margin and ultimately PL.

But do not ignore pricing power before concluding. If inventory price is going up not bad to have additional inventory.Ultimately cost fluctuations will be more beneficial than carrying costs.

There can be many more inferences, let me know a specific case; we can ponder over.

([email protected]) #148

Hi, have a question please forgive my ignorance.

For a long period if inventory is decreasing that would mean either company has a huge pile up or producing more than required.

On the above statement if inventory is decreasing how would the company end up having a huge pile instead it should have less stocks, am I right? can you please explain.

(The Confused Consultant) #149

Before I answer your question, I want to share couple of lines with you. I was wondering why did we have separate opinion and one of my stock answered the question.

Name: Divi's Lab (Disclaimer- my wife is mildly invested, I may have influenced decision. If you think a man can influence his wife:roll_eyes:

Stock looks down and recovering, right? Now see this.

Shooting up, same stock different time frame more importantly different perspectives having same objective.

What I meant was like this symmetrical relation ship, 1500, 1200, 900, 600 . This decrease may be due to excessive inventory produced during 1500, company is disposing now. If it can manage with a inventory level of 600 what was the necessity to have 1500.

But if we look at current management action it's trying to best to rectify errors or past. Of course right inventory level would depend on capacity level, fixed costs/operating leverage and customer requirement. Can't be a straight jacket solution for all.


(ravish) #150

Super i can understand the inventorybetter.:star_struck:

(The Confused Consultant) #151

Deferred meaning postpone something, deferred tax asset means postpone taxes to future. Why it happens? Company estimates it has over paid taxes than it's due. In time to come it should come back as in terms of tax relief (deductibles). Liability will be reverse meaning underpaid and expect more taxes in provision.

One of major reason for deferred tax is difference between Income Tax Act and Companies Act. Though books of account is prepared as per companies act , tax payment is calculated as per Income Tax Act. The difference is due to mainly:
1. Difference of accounting treatment between two regulations say a prominent one is depreciation rates are different in Income tax act and companies act. Most of Income tax depreciation rates are higher than companies act. It creates additional deductibles (tax benefit) and hence a deferred tax asset is created. Depreciation is first item u see there.
2. Similarly 35DD of Income tax act allows business restructuring expenses (demerger, amalgamation etc) to be amortised over five year period. As per companies act (which follows accounting standard) management has discretion upto 10 years. In case of differential treatment tax payable calculation will be changed. Right?
3. The item expenses where TDS is not deducted is self explanatory. This means I have charged full expenses as eligible in accounts without withholding (tax). Company is adjusting those proportion expenses for tax calculation.
4. Profit/ loss by Income tax computation lot of time varies with management computation. Like dis allowance of expenses, fringe benefit taxes etc.
5. Lease equalisation charges: accountant says there are two type of leases i.e. operating lease and finance lease. Taxmen says there is nothing called finance lease. What happens is depreciation charges are debited instead of lease rent to books (for lessee). This creates a timing difference and deferred tax asset. But lease accounting itself is a complex animal.

Does this help you? Let me know if you need more clarification.

A link from our taxmen website will clarify further.

(The Confused Consultant) #152

Unfortunately not in one place, I am sharing with you few key websites I use.

Hit for the sectors.

Use economic survey from RBI and working paper documents from Niti. A lot of details you will find.

I use capital market paid subscriptions as well.

Apart from above I find this website useful too.

Kindly note none of these guys care for stock markets. So we have to filter non essential by ourselves.

(The Confused Consultant) #153

Question 1

This Ratio is related to PE ratio, an extension of it. Hence EPS growth is considered.

Question 2

Current year growth, forward growths are estimated. I had used average EPS growth rate of 3/5 years but there was an issue. This ratio is effective for growth investing, looking back too much actually does not produce much records.

(RenjuM) #154

Thank you for your response. Appreciate it.

(Sreekanthreddy9) #155

Can someone provide idea on accrued depreciated value?

I mean we will be paying tax and interest to tax authorities and lenders respectively.but we won't be paying depreciated value to anyone.what will happen to his amount?

(The Confused Consultant) #156

Accrued depreciation or accumulated depreciation?

(Sreekanthreddy9) #157

Sorry..It's accumulated depreciation

(Susindar) #158

What are the best valuation metrics in Indian context? PE may not be the most appropriate due to growth potential of some stocks. How else can one value high PE stocks

(Susindar) #159

I have found advance Tax to be a good indicator for the coming quarters performance. Where can one access this information?

(Bheeshma Sanghani) #160

Cyclical stocks also have a high PE at the bottom of their cycle and a low PE at the top. They follow a reverse PE cycle.

(The Confused Consultant) #161

Accumulated depreciation is cumulative depreciation value of an asset which is appearing on fixed asset register i.e. asset is not retired from fixed asset register (removed).
So every fixed asset schedule you will find Gross Block i.e. cost acquisition, depreciation for the year, accumulated depreciation and net block. In other net block (the current value of fixed assets) is gross block minus accumulated depreciation.

Depreciation rates are calculated as per income tax guidelines, they have different rates than companies act. So financials prepared and what you see in annual report is adjusted for tax calculation.

When asset is retired i.e. either sold or made obsolete, accumulated depreciation and asset cost is reversed from fixed asset register. Difference between sale value and cost of asset minus accumulated depreciation is considered as profit or loss may be the case.

Example: I purchases a machinery for 1 lac on 01.04.15. Depreciation for 2015-16 was 20000, for 2016-17 was 15000. Here accumulated depreciation is 20000+15000=35000. The net block is is 65000 i.e. 1 lac minus 35000.

Now imagine asset is sold for 75000. First and foremost 75000 recorded as cash into bank being received. 10000 difference between sale value 75000 and net block 65000 considered as profit on sale of asset and recorded as profit. 1 lac removed from fixed asset register, 35000 accumulated depreciation as well. Depreciation and net block automatically becomes zero.

For income tax: depreciation is charged off as expenses as per income tax rates. The profit on sale is considered as income and put to tax.

Interest on income tax arises from delayed payment of tax, nothing do with fixed asset sale specifically.

Lenders if provided the loan for acquiring fixed asset will be taken care as per lending agreement. If the agreement says no disposal without clearance one has to follow. It depends on clauses mentioned there.

(The Confused Consultant) #162

Growth investing is calculated basis expectations not business valuation. PE you can use as expectations i.e. higher PE for a growth company better it is. Lower PE is dangerous for growth companies.

In my opinion its waste of time to value a company basis PE ratio.

(bamamurali) #163

I have some point to make about Many times i find 'Peers comparison" some companies are not featuring when they were low price, however it starts appearing when it reaches some level!
Pl check.