Investing Basics - Feel free to ask the most basic questions

[Garuna]

Thanks

HUL, Sept 2022:

From balance sheet,
Other liabilities = 21198 Cr
Other assets = 15360 Cr

So Current ratio = 15360/21198 = less than 1

Also working capital = 15360-21198 = Minus 6K

Is this calculation correct?

I am assuming that current assets = other assets and current liabilities = other liabilities

Other liabilities are listed as trade payables, non controlling interest, advances and other items

Other assets are as inventories, receivables, cash, loans/advances and other items

Let me know where i am making a mistake pls

This is taken from screener.in

[vansh1208]

You are right!

I think it’s screener’s mistake. Sometimes you can get wrong data from third party services and data vendors.

If you feel any mismatches, you can report it on screener’s help desk. Just fall back on official quarterly results pdf.

[ashishp2010]

Basic question:
Everyone is gung ho about idfc first bank results.(Q3 FY23)
However, when I check screener ‘financing profits’ for the quarter are negative.
Profits are because of ‘Other income’.

I see most experts are also happy with results, what am I missing?
Thanks!

[nirvana_laha]

Pro tip: For banks and NBFCs don’t check results via screener, refer quarterly presentations, result announcements and ARs. The P&L flow for a financing company is slightly different than any other company. The P&L flow goes something like this:

1. Interest Income (A)
2. Other income - fees, commissions, brokerages, off book AUM earnings etc. (B)
3. Total income (C = A + B)
4. Interest expenses (D)
5. Net total income (E = C - D)
6. Operating expenses (F)
7. Pre provisioning operating profit (G = E - F)
8. Net Provisions + Write off expenses (H)
9. PBT (G - H)

Revenue for a bank is made up of both 1. Interest income (Lending income) and Other income (Fees + Off book AUM income). Other income for banks is not necessarily one-off income, it is usually quite stable as fees/commissions are dependent on usage of regular products by its clientele. While Interest income is the core income of a bank, fee based income is equally important because it gives a boost to the ROE of a bank (To earn fee income you don’t have to first raise capital and then lend it out).

A bank with sustainably high Other income as a % of net total income is golden.

[nirvana_laha]

Hi,

Look up Dupont formula for calculating ROE. That will help you understand the components of ROE. Margin is just one component of 3.

Margin is what most investors are immediately draw to. But a company may have low margins but great asset turnover and thus still be making good ROEs.

Eventually, in the long run, a company creates value for equity investors when its ROE is consistently greater than its cost of equity.

Of course a great company need not be a great investment. To make sure a great company turns I to a great investment, you also have to buy it cheap or at least at fair price. If you want to get an idea on how to calculate / estimate fair price from first principles, look up Discounted Cash flow analysis and go deep into it.

[vansh1208]

Redington is involved in trading business. Usually when you are buying products from manufacturers and selling to other businesses (B2B), you will never have power on margin growth.

Why? Because anyone can trade similar products (no distinction). The only distinction is the price per product (due to the quantity you buy).

Let’s say Redington can trade a smartphone for Rs. 10,000. Other players can trade the same smartphone at a price of Rs. 10,150. Redington cannot say “hey, I am Redington, Take my smartphone for Rs. 15,000”.

When margins are low, what to see instead?

The answer is, Efficiency Ratios. Take a look at Inventory Turnover, Asset Turnover etc. Another thing to see is the working capital needs (Inventory, Trade Receivables, Trade Payables, Cash Conversion Cycle).

Hope this helps!

[meekinvestor]

When you look at a company is the management considered the most important? I am here talking about the Life Insurance Corporation. It invested in the General Insurance Corporation to rescue its IPO. The IPO had floundered. GIC IPO was at "According to market players, LIC alone had put in a bid that was worth between Rs 4,500-6,000 crore. The insurer does not disclose its buying and selling figure …

LIC rescues GIC Re’s Rs 12k-cr IPO with up to Rs 6k-cr boost - Times of India

“GIC Re IPO subscribed 1.37 times, LIC accounts for over 50% of the bids.If the IPO is priced at Rs 912 a share, the Centre, which sold 107.5 million shares in the IPO, will raise Rs 9,800 crore… GIC Re raised Rs 1,560 crore in the IPO, to be used for augmenting its capital base.”

The IPO was at the price band of Rs 855-912. It opened at at Rs 857.50, a 6% discount to issue price.
This is just one example of its Bhamashah like acts to rescue companies with bad prospects, often at a loss to the LIC.
It is heavily invested into the Adani Group, which the retail investors, the cautious ones, have shunned because of high valuations.
It has profited, like many retail investors did, from the dizzying pace at which the shares have flown skywards.
One thought that the LIC had learnt its lessons. But it looks like it never will, till it acts on the directions of the govt of the day.

Disclaimer: Was invested in LIC. Have dumped it.

[saikat_halder]

My question is basic. Hope its relevant question.
I understand basic fundamental and feel that PE is a good indicator of stock valuation. but few stocks under my radar are always having high n very high PE. example: Nestle, pidilite, titan etc.
I am tracking it for may months and looks like its always high.
so what am I missing? how can I enter the stock if its always high? or, is it normal to stay high, because these are good stock, so investor always buy them at high premium?

[ChaitanyaC]

Valuation in itself is a field, it is like an ocean, and as such there are no straight forward answers, and each company’s valuation should be looked independently, and valuation is subjective many times.

So at the beginning of one’s investment journey, valuation is looked at from standard parameters like PE, price to sales, DCF, FCF, and as one progresses as an investor, gains some knowledge, one comes to know that valuation although significant, is not the only parameter that should be taken into consideration while buying stocks, there are many other things, particularly when one understands the business more, and that there are reasons for such valuations, which may disappear quickly, but until they last, high valuations can sustain.

Although sometimes, with stocks that run up a lot in short time, more often than not, the valuations may not sustain, particularly stocks that are talked about everywhere and people are buying without knowing about them.

This is not to say that, valuation is not important, in fact, there is a set of investors, value investors, who know about the business, who assign a price to the business and buy only when the price fits the future growth, even book profits when they think price is not sustainable if it goes up by much. But these kind of bets may take a while to realize sometimes, because market may be focusing elsewhere, these investors have invested in stocks that may see less growth or even no growth for some time, so patience is needed here, hence the other side of investing, growth investing, wherein people don’t want to wait, but want to participate in something that is growing.

I guess, at the beginning of the journey, investing w.r.t valuation, quantitatively or even qualitatively, is not easy for everyone. After gaining some experience, there will be lessons learnt regarding valuations, lessons of different kinds.

So numbers alone don’t present the full picture, understanding the business, estimating the growth, the likelihood of that growth happening, the obstacles that may halt the growth, competition etc help to have a more broader view of the price.

Just some observations.

[vansh1208]

You are never going to find companies like Titan, Pidilite and Nestle undervalued (with a big margin of safety).

So what’s the best thing you can do?

Buy them at a fair price!

But How?

Step 1: Look at the weekly chart of Nestle (for example)

Step 2: Apply a 200 EMA on that chart. (You should have each data point streched to about 4 years)

Right now, 200 EMA is at 16,583.42 (implied fair value) while the stock price is at 19,021.50

Step 3: Wait and try to buy it lower the 200 EMA.

(Note: In theory, it’s called efficient market approach. Please be aware to only use this approach with stable growing companies with no big price jumps like Titan, Pidilite, Nestle etc)

I believe, PE ratios will never work out on the companies you are after. So the best you can do is use some technical analysis to come with with a fair value. It’s a slight variation of efficient market approach.

Hope this helps!

[kumars1672]

I am not expert. But my thoughts are that we can’t be perfectly correct in valuation. but we can try to be approximately right. Now coming to valuations, there are different methods. Some people use DCF, some bull/bases/bear scenario depending on growth expectation. I personally found DCF hard and again subjected to error since we are the one putting growth expectation. One simple method could be look at historical PE(5 or 10 yrs) and buy around that price. In case you see growth improving drastically in last 1-2 years and think this is sustainable growth, you can pay little higher than the historical PE. I think this approach work for investor like me who want to keep it simple. Just my thought

[Kuber_Chauhan]

How to find replacement cost?

[meekinvestor]

@ChaitanyaC

But these kind of bets may take a while to realize sometimes, because market may be focusing elsewhere, these investors have invested in stocks that may see less growth or even no growth for some time, so patience is needed here, hence the other side of investing, growth investing, wherein people don’t want to wait, but want to participate in something that is growing.

That’s right. It takes a lot of patience. I read about investors who would buy shares and with a faith akin to religious, are willing to wait interminably. They will also sit on case interminably.

I only envy them.

[meekinvestor]

Somebody, please start a thread of glossary, with simple explanations, not bookish definitions.

Today I came across this word, used by ICICIdirect talking about Siemens:

Blockquote

SOTP is **the process of determining what the individual divisions of a company would be worth if they were spun off or bought by a different company. SOTP enables a company to establish a useful measure of its value which can be highly relevant in the case of a hostile takeover or a restructuring.

[nirvana_laha]

Can anybody elaborate/point-me-towards what SEBI or Indian accounting standards say about the need to get domestic/foreign subsidiaries of Indian companies audited? I see many companies reporting numbers without getting their subsidiaries audited, even when they are material subsidiaries.

So I take it that the laws don’t mandate this? But from a corporate governance point of view, how does the market view this practice of not getting material subsidiaries audited? To my mind it seems like a big deal but I have never heard too much noise about this in forensic audit or corporate governance discussions.

Would be grateful for answers around this.

[vansh1208]

A proviso to section 136 of the Companies Act states that every company having subsidiaries shall place separate audited accounts in respect of each subsidiary on its website.

However, on 9 February 2018 the Ministry of Corporate Affairs (MCA) issued a relaxation which made a distinction between subsidiaries depending on whether their home jurisdiction required auditing or consolidation.

The MCA stated that where a foreign subsidiary is required to provide consolidated financial statements under its home country law, then the requirements of the proviso to section 136(1) shall be met if those consolidated statements are placed on the website of the Indian listed parent company.

Similarly, if a foreign subsidiary is not required to audit its financial statements, then its unaudited financial statements can be placed on the website of the Indian parent. In that sense, the rigours of section 136(1) were mitigated through a more practical approach that the MCA adopted.

Source: Financial Statements of Foreign Subsidiaries of Indian Listed Companies - IndiaCorpLaw

[aspireinvestor]

when i try to go to Saurabh Mukharjee’s Marcellus website, i get this warning. Is it that this site is not allowed in US?

"
The information contained in this website is not intended for any person who is a resident of the United States of America or a resident of a jurisdiction, the laws of which impose prohibition on soliciting the advisory business in that jurisdiction without going through the registration requirements and/or prohibit the use of any information contained in this website. If any person accesses this website by giving false declaration, he/she shall be solely liable/responsible for any adverse consequences suffered, legally as well as financially, pursuant to use of any information contained in this website.

I hereby confirm that I AM NOT a resident of the United States of America or a resident of a jurisdiction, the laws of which impose prohibition on soliciting the advisory business in that jurisdiction without going through the registration requirements and/or prohibit the use of any information contained in this website."

[Chandragupta]

Elecon Engineering has given a guarantee to Swedish Pension Authority on behalf of a 100% step down subsidiary of a Wholly Owned Subsidiary, which is appearing in the Standalone Financial statements (page 134 of AR FY22) as a Contingent Liability.

However, the above record is not appearing in the Consolidated Financial Statements. What is the reason for this? Why should this record not appear as a Contingent Liability in the Consolidated statements also?

[Akashdeep]

Hi, since I am undecided on individual US IT stocks but was interested to invest on a basket. I came across the Mirae Asset FANG+ etf, which tracks the actual FANG etf. What is the general range lf tracking error that exists?And why does a tracking error happen?

[Harsh04]

A )How to calculate Days in inventory through the screener data downloaded in excel format ?

I came across this formula, but i am not sure if it is right… 365 / (Raw material cost / average inventory)

I can’t understand what role does raw material play here ?

i know the other simpler formula is :
(Average inventory/ COGS) * 365

However with this formula i am not able to calculate COGS from the screener data available in excel

Can any 1 help me with COGS calculation by taking data from screener or from company’s financial statements?

B) In the adjustments for calcultion of CFO…
There are 2 line items : 1) finance cost, 2) interest income

Why do these figures vary from ‘interest paid’ under cash flow from financing and ‘interest recieved’ under cash flow from investing respectively ?