My personal opinion, I can try to trust future only if i can trust history.
News can always be recycled for a PR, best to wait for the results & numbers.
There are many examples when management keep coming back with news and encouraging forward looking plans.
D- Exited last year.
Some more ‘gems’ from the rights issue prospectus:
And this one on expansion plans
And discrepancies in audit reports
And 99% of sales are to 2 customers
And action by SEBI
And GST investigation against the Company and promoter
And WTD and CFO have no valid proof of their qualification
And delay in dividend payment and failure to open dividend account
And pending statutory dues
No comments.
8 Likes
2 Likes
Fantastic work, maintaining the high standards of valuepickr !
3 Likes
1 Like
If everything was crystal clear that this co. Is possible fraud then why FII’s invested their money?
How they fall in this scam?
No due diligence?
I was asked a question recently in the context of fraud (specific to this business). I hope the response helps others as well. Here it is:
Q2. How to detect the fraudulent businesses?
This is very easy. Follow the cash. If a business cannot generate cash flow then it’s very likely that it is a fraud. And the cash flow that I am talking about is not the one mentioned in the cash flow statements or the one that you see on screener. You will have to tear open their financial statements and then judge what is being added back to the net income. When it comes to numbers do not believe everything the management says; follow the trail of numbers. I can give 2 examples for this. (a) The first one is Amazon. Their cash flows where negative for a very long period of time. However it was negative because of excessive capital expenditures - one has to go to the footnotes to find out what this CapEx is where they’re spending and judge whether the spending makes sense or not. As the increased CapEx their depreciation also increased. However, it took them a very long time to be cash flow positive. There are about 10 to 15 line items under cash from operations after net income that a business uses to calculate its cash from operations. You will have to make that judgement whether you should include those items and add them back to the net income in order to calculate cash flow or not. My advice on this is any line item that makes you question “what is this” should not be included in your cash flow calculations. You would be surprised to know how many items they expense 1st and then add back as a non cash charge to calculate cash flows! So All in all follow the cash. This might mean you have to dig up the financial statements of the past five or ten years. And believe me it is not that difficult - if you have printed out 10 statements of cash flow (one for each year), Then calculate what you think should be added back to the net income to come to their cash flow. If it’s negative year after year (Like Mishtann foods; my second example) – It is likely a fraud. Also if you can’t figure out what the numbers mean and how they add up - it is likely a fraud. If it is difficult to understand the numbers - it is likely a fraud. Don’t buy a business because everyone else is excited about it while you can’t make sense of the numbers. Markets can remain irrational for longer than you can remain solvent.
Full disclosure: I don’t think I should be the person from whom you should be learning there are plenty great teachers out there. I learned everything from them. These teachers are: Aswath Damodaran, Joel Greenblatt, Bill Ackman, Terry Smith (He has a nice book on accounting fraud (accounting for growth or something like that)), Howard Marks, Mohnish Pabrai and last but not the least - Warrant Buffet and Charlie Munger. It’s going to be a long process so patience is required.
6 Likes