What exactly is earning visibility? How to I find it? For instance, recently many VP members felt that there is no clear earnings visibility in KSCL. To be specific what has changed in KSCL which resulted in poor earnings visibility?
Earning visibility is possibility of enhancement in the earning/ profitability in the near future.
Earnings visibility, a lot of answer comes from prior history. Two ways to find out this answer to START with:
One is find out source of growth:
- Has company managed the growth earnings by selling higher volume of sales or services. Answer to why you have to search through information- if the volume growth has come from a regulatory license say like mine (lease valid till 2019). You know the answer, but there can be multiple cases.
- Whether it has managed to increase the price consistently over the years? Not easy unless your product offers some perceive and real differentiation. You can check the price to know, and quality metrics etc. These are not sustainable if comes via technology, some one else will walk in with a new technology and over ride you.
- It started offering new products or services? Look at extrinsic opportunity, if you are operating in opportunity with huge scope you will continue to roll out new products or services.
- Grow inorganically i.e. by acquiring company. This is tricky, needs a special situation.
Second is quality growth:
If the earnings growth has come from increase in revenue, operating margin and cash flow nothing like it. But imagine if you sale asset to boost earnings, or using old cash to buy back shares etc.
Finding this two will throw you up a lot of direction towards earning visibility.
Hope this helps a little!
@suvendurath Thank you Suven for replying. Lets take the case of Kaveri seeds.
Source of growth:
- The company has been increasing it sales over the years. Below is the sales for the last five years.
- The company is able to maintain double digit margin over the time.
- The company is highly dependent on cotton seeds. But it is looking to expand its product basket.
But in kaveri seeds thread, recently (specifically after the crash) many members feel that there is no earnings visibility. I am trying to understand what has changed in the company that make it difficult for earnings visibility. Am i missing something in KSCL?
I am aware of the below developments in KSCL.
- High royalty payment to Monsanto.
- Monsanto threatening to leave India.
- KSCL dependent on Monsanto.
- Drought for two consecutive years .
- SEBI Forensic audit
The above factors are around for quite some time. But I am finding it difficult to know what exactly changed in KSCL that make it difficult to predict earnings.
@Dhinakaran, apologies…was away somewhere else.
It would be helpful if you can put a small profile of the company which covers:
- what products or services its offering
- whether such product enjoys competitive advantage (earnings forecast for weak companies bit overboard)
Now what we data we need here is
- quantity of seeds (?) sold here year wise. That will show us volume increase or price increase.
- list the products offered over at least three years, that will tell us whether there was a new product offering which can indicate further whether margin jumped because of that.
Your developments listed have impact on many places, try to categorise the bands for example for me
High royalty payment to Monsanto. - i will take it under financial risk management
2) Monsanto threatening to leave India.- not sure, may be affecting competitive advantage and financial risk management both!
3) KSCL dependent on Monsanto.- same as 2
4) Drought for two consecutive years .- financial and operational risk manageemnt
5) SEBI Forensic audit- compliance risk management
@suvendurath Thank you! That gives me a good starting point to work on. Thanks again for taking time and replying to my queries. I appreciate your effort to help beginners like me.
Please let all of us know your out come also.
If you can crack “protected earnings which is growing” for any business you are done.
Waiting for your outcome.