Investing Basics - Feel free to ask the most basic questions

Stock Analysis & Valuation
590

Please help me to know more about Debt to Equity and Interest Coverage ratios.

  1. Do we have to emphasize on the “Interest Coverage ratio” while checking the “Debt to Equity”?

  2. Is it a good practice to check the “Interest Coverage” ratio (debt paying capacity) of the company irrespective of the sector where it belongs.

  3. Also, is it relevant to check the Interest Coverage ratio if the company has low or no Debt. Here can we say Interest Coverage ratio value greater than 1 is good?

Please suggest.

591

The Business Model Canvas should be a good place to begin: The 20 Minute Business Plan: Business Model Canvas Made Easy

The best way is to read a lot of books of conducting business (The Virgin Way, The CRISIL Story, The Outsiders, Straight from the Gut and so on)

  1. Yes. Interest turns calculate the short term capability of the company to meet interest payments.

  2. Yes again (Of course, BFSI should not be included here). Debt holders don’t take pity on the borrower just because they’re in a ‘difficult’ industry (Actually, state-owned banks might actually do that sometimes). However, Interest turns aren’t the only ratios that judge debt repayment capacity. Debt is made up of both interest payments and principal repayment. Interest turns judge the company’s ability to meet interest payments. It’s the simpler D/E Ratio that judges the company’s ability to repay the principal (Make sure to include Contingent Liabilities as well in the numerator).

  3. If the company has low or no debt (I’m assuming <0.5), then yes, it’s a good practice to check interest coverage ratio. However, if a company has limited debt, I’d expect it to have an interest coverage of more than 2-3. If not, it indicates that whatever small amount of debt they’ve taken is costly and reflects badly on the capital allocation decisions of the company.

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592

@dineshssairam Thanks.

You have explained it well in minimum words.

For Banks and Finance companies can it be better to use Net Interest Margin, Gross NPA and Net NPA to calculate the debt and write-off loans instead of Debt to Equity and Interest Coverage?

593

Yes, those ratios should be okay for BFSI firms. I’d also suggest you to monitor their Credit Rating reports.

595

1)How to check the loan book of a bank in balance sheet?
2)How CASA is calculated ?
for example a bank has 10 accounts and 10 people has deposited 10X100 RS ie total 1k is deposited in banks.
suppose a bank has given 900 rupees as loan ie the CASA of a bank is 90 ? Can any one please educate me

Thanks in Advance:)

596

Thank you for accepting my request to be a member of this forum. I have a learnt a great deal reading the threads in various forums and have started reading Pat dorsey / Peter Lynch. Still have a long way to go. My question is regarding the ROIC calculation. I am trying to calculate the ROIC value of a company but it doesn’t seem to match with the value mentioned in screener.in. Can any of the esteemed members help me in calculating the ROIC or is it a problem with screener website. Per my understanding,

ROIC= NOPAT/ ( Fixed assets+ working capital)
For instance, I am taking Asian paints

Fixed assets= 2568 crores
Current assets=5500 crores
Current liabilities=3398
Short term borrowings=0 crores
Deferred tax liabilities=270 crores
Working capital= 5500-3398+270=2372
Invested capital=2568+2372=4940
Operating profit=3,407
NOPAT= 0.7*3407=2384.9
ROIC=48%

But the screener shows 58%

597

The great thing about Screener is that you can view how everything is calculated once you download the excel file.

Here’s what Screener is using to calculate Asian Paint’s Return on Capital Employed as on 2018:

Operating Profit = Rs. 2923.26 Cr
Depreciation = Rs. 311.11 Cr
Tax = Rs. 917.03 Cr
Fixed Assets = Rs. 2568.53 Cr
Working Capital (Other Assets - Other Liabilities) = Rs. 1271.74 Cr

The final calculation done by Screener is as follows:
(2923.23-311.11-917.03)/(2568.33+1271.71) = 43% (As on 2018)

You can see this specific formula in Cell K24 of the ‘Balance Sheet’ sheet.

Incidentally, queries specific to Screener can be posted in this thread:

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598

You’ve already understood it perfectly. Valuation is subjective and Ratios are simply guidelines. For BFSI frms, I would suggest that you use a Dividend Discount Model for valuation.

Our own @Yogesh_s has created one:

Obviously there’s no “acceptable” P/B. Gruh Finance trades at a staggering 16+ P/B Ratio and PNB trades at 0.63 P/B. That may or may not make them overvalued or undervalued right off the bat. You’ll have it value them at the sum of Discounted Dividends in order to find out.

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599

@dineshssairam
Where is the option to download the XLS, is this only available on Desktop site?

Thanks.

600

GRUH is trading at 16+ p/b because it have good record of RoE, RoCE and Dividend.

Please correct me if wrong.

601

This is the last post in which a link to the model has been shared. I’m assuming it works:

I don’t know. And I try my best not to reason with the market.

602

Thanks.

I just wanted to say, some companies trade at higher valuations than peers because of good fundamentals and trust.

603

Hello all The basic idea of value investing is to buy rupee worth of asset at less than rupee say 60 paise.but how can you know correct intrinsic value of company?is it from past profits?or balance sheet?my another doubt about growth investing is in 2000 ITwas growing it busted in 2008 infra was growing and busted and now nbfcsconsumption themes are growing how can we value high growth companies?and how can we know how far growth will be there.real growth will be tested in times of bad Economy conditions?

604

//but how can you know correct intrinsic value of company?//
you donot. you can arrive at a certain figure using various valuation techniques. but these figures will differ and hence only time will tell which is a correct one.
the underlying assumptions will change the outputs too.

there are no evergreen sectors… each rise and fall with times and prevailing economic conditions.
in todays fast changing times, it would be too difficult to gauge or predict what happens say even next year…
so, the idea would be to invest in good cos and track the developments… any development that deviates from your storyline demands that you review your position.

605

http://forum.valuepickr.com/t/how-to-analyze-nbfc-companies/5347/24?u=atuld

  1. When to use P/E ratio and when to use Price to Book while analysing NBFCs?

  2. Is it a correct approach to ignore the P/B when company paying the Dividend regularly?

  3. What is the link of above two ratios with respect to RoE? Specially if a company is generating a good RoE (e.g > 25) and healty NIM and low GPA/NPA?

Can someone help in identifying above?

Thanks.

606

The dividend income will be recognised by a company when it’s entitlement is established i.e. after approval of final dividend in the AGM. In case of interim dividend on its approval by the Board. I want to know if a subsidiary company declares interim dividend, how it is treated in the accounts of holding company in its standalone financials and in consolidated financials. In the consolidated accounts the earnings of the subsidiary will be consolidated and in the standalone the dividend is taken. Does it not amount to accounting the earnings twice. Can somebody please clarify.

607
  1. You can look at industry P/E, P/B and then try to compare it with the company’s ratios. But they’re ultimately just rule-of-thumb. They can only help so much.
  2. No. I don’t see why you should. If there’s an extraordinary dividend paid, it will reduce the P/B by a lot momentarily. But if the dividends are being paid regularly, then it shouldn’t cause that much of a difference. However, if the company is paying a very high rate of dividends when compared to the industry, then yes, it probably would cause problems in comparison.
  3. RoE is Earnings divided by Equity Employed. P/E and P/B determine how much the market is paying per unit of Earnings and Equity. So, high RoE stocks tend to have higher P/E and P/B. Once again, these are all just rule-of-thumb.

A Subsidiary’s Dividends do not form part of the company’s P&L. The usual practice is to create a receivable (Ex: Dividend Receivable) in the B/S against Retained Earnings once the Dividend is approved. As soon as the Dividend is received, the receivables account (Ex: Dividend Receivable) is cancelled against actual dividends transferred from the subsidiary.

Vice versa, the subsidiary will also deal with dividends within the B/S itself (Creating a ‘Dividends Accured’ account against Retained Earnings and then writing it off once the Dividend is paid).

608

There are largely 3 valuation methods:

1. Intrinsic Valuation: This method values a company at the sum of the present values of all the free cash flows a company is likely to produce from now to kingdom come. The most famous tools here are the DCF and DDM. VP has threads on both: DCF thread, DDM thread. These models require you to understand the company’s business. the industry’s economics, in an attempt to convert the understanding to projecting a future for the company (So, a well-informed story for the company, supported by numbers grounded in reality). The biggest risk here, is of course, model risk.

2. Multiples/Relative Valuation: Probably the most used and also the most abused valuation model. Ratios like P/E, P/B and P/CF are compared either to the company’s own history or the industry. From there, an ‘Exit P/E, P/B, P/CF’ etc are decided. Then all it takes is a projection of the company’s Earnings, Book Value or Operating Cash Flow. Then, multiplying the former by the latter will provide you with a value. You can see how easy this is to do, but also easy to misuse to fit one’s own whims and fancies. So, this is a double-edged sword. I think someone posted a very simple Multiples valuation excel file somewhere. I forget who. If someone remembers, do help out.

3. Sum of Parts / Liquidation Value: Least used, but possibly the most accurate. The company is valued at how much it would be sold for if it shut down tomorrow. The problem is, it requires a lot of expertise to determine how much each asset of the company is worth. More feasible for manufacturing companies than service companies. I can’t think of any cons in this model, because this is just very close to reality.

There’s no ‘value investing’ or ‘growth investing’ or ‘quality investing’ or ‘momentum investing’, there’s just investing, which is a search for value. What you’re asking for is whether one can predict if a company can create wealth during a specific period and destroy wealth during a specific period. With very few exceptions (Like Commodity companies, whose fortunes are highly linked to one or two factors), it’s impossible to do this.

As a side note, Warren Buffet said that a company which can survive periods of severe inflation is probably a great company. That is to say, the company can pass on the additional costs imposed on it to the customers and live to see another day.

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609

Thank you for the clarification.
It may not make a difference to total cash flow,: but,
Suppose X has 850000 shares (85%) in Y.
Y declared Rs.25 per share dividend for 2017-18.
Which was approved in AGM in Aug 2018.
Y also declared interim dividend of Rs.50 per share in August 2018.
Company X would be accounting the dividend income as other income in Q2 FY 2019.
Company X does not publish the consolidated financials in quarterly accounts.
At the end of the year 2018-19, if the EPS of company Y is RS.100, that would be accounted by X in consolidated accounts and part of the same EPS would be in standalone financials as other income.
I have this doubt in relation to a listed company.

610

Sorry, I misread your question earlier. I have edited my answer now. Hope it makes sense.

  1. Usually denoted as ‘Advances’ or such in the Assets side of a bank’s B/S.
  2. If you mean teh CASA Ratio, it’s ‘Current + Savings Account Deposits / Total Balances’ with the bank. A more likely example is, if the bank holds Rs. 100 in Deposits and Rs. 45 worth of it is in the form of Current and Savings Accounts, then the CASA Ratio would be 45%
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