The fifth part of Series “Current temptation, future frustration“. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.
I am starting this series with one of the company which is engaged in import and export agent, representative, contractor, selling agent, the broker on wholesale cash and carry basis for metals, minerals, iron and steel products, pipes, household items, general merchandise etc, has a 52 weeks low price of Rs.4.60 and LTP is Rs.31.65. This company has rewarded ~6.88x of return in a year.
Let’s start looking at the numbers.
When we look at the balance sheet then it seems that the company does not have any issue. It has reduced all debt, also it has huge investments.
Wonderful… The company still available below investment value after 6x price raise.
Let’s go further detail.
If we look at the income then the company does not have any income available. Also, the company is traded at ~530x Mcap/sales.
So this company does not have any business. Only investment of the company is good then this situation seems similar to Bluechip stamp investment made by Sage Mr.Buffett.
Let’s check the investment.
The company has ~30% of investment into liquid assets and all others into unquoted & related party investments.
So the company keeps giving loans to related parties.
The company does not have enough plan assets to fund gratuity.
This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
The fourth part of Series “Current temptation, future frustration“. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.
I am starting this series with one of the company which is engaged in Entertainment / Electronic Media Software, has a 52 weeks low price of Rs.3.05 and LTP is Rs.9.20. This company has rewarded ~3.02x of return in a year.
Let’s start looking at the numbers.
We can see that the company has operating level profits but a loss at a net level. It can be possible if the business is at the nascent stage. But major expense is depreciation so have to check why huge depreciation charge.
When we look at the balance sheet then it seems that the company does not have any issue except debt. But when we look at the fixed assets then we get shocked. The depreciation rate is ~40% in FY19 and ~72% in FY20. I have not seen such a high-interest rate in other leading IT companies, there is max ~20% of depreciation rate in other IT companies.
When we move to the next, related parties then….
Then 72% of income in FY20 and 78% of income in FY19 comes from related parties. The company has 93% of receivables in FY20 of related parties.
This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
The third part of Series “Current temptation, future frustration”. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.
I am starting this series with one of the company which is engaged in manufactures industrial speciality oil, ink oil, residue oil, Jal pentane mixture and lubricants, has a 52 weeks low price of Rs.48 and LTP is Rs.139. This company has rewarded ~2.90x of return in a year.
Let’s start looking at the numbers.
We can see that the company generating profits. But the company do not have major other expense means the company do not have major fixed assets or borrowings.
When we look at the balance sheet then it seems that the company does not have any issue except debt. But when we look at the receivables then we come to know that the company has 68% of receivable of total sales in FY20 but do not have major inventories. Is this a manufacturing company or an IT company? So that though the company make profits but cannot able to convert it into cash flow.
But there are more cockroaches available.
Journal entry of Deferred expenditures
Deferred expenses Dr
To Cash
So that here expenses directly get settled into the balance sheet and do not comes to an income statement. If this charges debited to income statement then the company is into the losses, not in profits.
Journal entry of Deferred Income
Cash Dr
To Deferred Income
When have to give effect to income statement then
Deferred Income Dr
To Revenue
Again, a direct balance sheet effect rather passes through the income statement. This income can be used for future drought period.
The company has contingent liabilities ~23% of revenue and ~11.71x of net profit.
This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
These are few things done by the author. We need to take action and consistently performing the same for achieving the goal. We have to learn from others, experiment those learning and has to do what is really suitable for our temperament.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
The second part of Series “Current temptation, future frustration“. This series is based on the companies which are currently darling of the market and many trying to catch such opportunities but it has a probability to become a reason for future frustration. It can wipe out the majority of gains in wealth. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth.
I am starting this series with one of the company which is engaged in manufacturers of Wind Turbine Generators (WTGs) in India, has a 52 weeks low price of Rs.16 and LTP is Rs.48.15. This company has rewarded ~3.01x of return in a year.
Let’s start looking at the numbers.
We can see that the company has a declining trend of revenue, operating & PAT level also incurring losses. But the company has delivered a good return in a year so it might be possible that the company has a strong balance sheet.
When we look at the balance sheet then I got shocked. The company has trade payable, inventories and receivables are higher than sales. Also, the company is getting higher advances from its customer which is again higher than sales so that the company should have a monopoly and everyone wants its products only. But then why revenue keeps on declining?
Cash conversion cycle of the company is of 497 days in FY20 means its take almost 1+ years to convert to cash. Even the company has receivables, inventories and payables as a % of sales are 174%, 131% and 139% respectively.
When I have looked at the related party transaction then Rs.450 cr of sales in FY20 and Rs.648 cr of sales in FY19 done through related parties which are 59% of sales in FY20 and 45% in FY19.
Another part, when we look at the advances from customers then all are from related parties only. This trick is used by the company to show slightly better CFO. Also, receivable from related parties is 20.49% of total receivables in FY20 and 18.40% in FY19. And if we look at the receivable as a % of sales to related parties then it is 60.16% in FY20 and 46.31% in FY19. Now, I am curious that related parties have ~Rs.1100 cr of the fund to give as an advance but do not have Rs.270 cr to pay for receivables.
When we look at the exposure of the company to related parties then it is worth of Rs.865.46 cr in FY20 and Rs.708.10 cr in FY19 which is 16.35% in FY20 and 14.94% in FY19 of total balance sheet size. These related parties are making losses.
The company has Cumulative CFO < Cumulative PAT which shows difficulties to convert PAT into Cash Profit. Also, CFO is artificially boosting through advances from customers which is from the related parties.
This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
There is an opportunity available, we need to train ourselves to see it. There are 10 steps mentioned by the author which he has used for creating wealth.
1) Find a reason greater than reality: the power of the spirit
There is always a reason for doing something which is a combination of what wanted to do and what we don’t want.
The author mentions that he does not want to get employed, want to get financially free which provides him with freedom of time. If our reasons do not strong enough then we do not get ready to work hard for doing a thing which we have decided to do. We should understand that without a strong reason or purpose, anything in life is hard. First, complete this step before proceeding further.
2) Make daily choices: the power of choice
We have a choice while we get a rupee. With this rupee, we can choose to become a rich, poor or a middle class through our spending habits. As we have discussed the assets and liabilities so that we need to work on increasing our assets column.
We do not have money then OK but how we spend our time, money which is our choice. We have a precious time with us and we can choose it for learning or just pass it out. As we have a single rupee and choice is us for how to use it. Similarly, we have every single minute and the choice is us how to spend it. When someone teaches us something then without getting arrogant, we need to understand why he is saying such, keep our mind open. We need to keep on learning and after that requires to make a mistake which helps us to understand it in detail. We can learn from the mistake of others. We have to invest in our greatest asset which is our mind. One or two of the successful investment does not make us a successful investor but we need to keep on learning and growing.
3) Choose friends carefully: the power of association
We should not have a friend with comparing to the financial statements, rather we have a friend by looking at their vow of becoming friends. We can learn from rich or middle-class friends also.
Many of the people have their point of view and we need to listen to them with an open mind. We can come to know something new also. We need to know what we are doing and true to ourselves. We do not have to go with the crowd for wealth building.
4) Master a formula and then learn a new one: the power of learning quickly
We have to learn many things and have to master particular things. We have to be disciplined to implement what we have learned. After master into the one learning, we need to move to another learning to master it. In the current fast-changing world, we need to learn fast otherwise our learning will be outdated.
5) Pay yourself first: the power of self-discipline
If we do not have self-control, then we cannot able to become rich. Without self-discipline, lottery winner also broke.
The three most important management skills necessary to start your own business are the management of 1. Cash flow 2. People 3. Personal time
These skills help us to grow and richer but require greater self-discipline. So that pay yourself first is self-discipline and important concept.
This means what Mr Buffett has mentioned
Income – Investment = Expenses
We should not get trapped of the liabilities and if we owe liabilities then we should not work to pay for it rather others need to work to pay for it.
Rich knows that savings and investments are for creating more money, not to pay bills.
This rule does not encourage self-sacrifice or financial abstinence. It doesn’t mean to pay yourself first and starve. Life was meant to be enjoyed.
06) Pay your brokers well: the power of good advice
Many a time, we try to save cost and focus on removing intermediaries but we forget that paying well to the professional help us. They provide us with a piece of useful information and services which can help us well.
We have to separate genuine and fake professional and then appoint them as our advisers.
As we have seen that we require to have the skill to manage people. The real skill is to manage and reward the people who are smarter than you in some technical area.
07) Be an Indian giver: the power of getting something for nothing
As we all are an Indian and we people want to know how fast they get their money back.
Wise investors must look at more than ROI. They look at the assets they get for free once they get their money back. That is financial intelligence.
08) Use assets to buy luxuries: the power of focus
It seems easy to use assets column to build a cash flow but difficult in practice. When we are on a diet, many noise and temptation affect our strict actions do not follow our plan. Similarly, when we have prepared a plan to follow our investment and build assets column then outside noise and temptation to fulfil the needs going stop us. In the current environment, very easy to get a loan for any need. And that creates a temptation among us. But we should focus on the creation of the assets column rather bring liabilities on the balance sheet.
Majority of the people cannot able to master their self-discipline and that stops them from becoming rich.
I do not say that do not buy a luxury or stay away from it. But rather to buy it through the liabilities, buy it from the cash flow generated from the asset’s column. And till the time, we do not build our assets column, we have to stop our temptation.
When we have a hero, we try to become like them. And this act helps us with lots of learning. I have a hero in my investment career who are Neeraj Marathe Sir, Kuntal Shah Sir, Warren Buffett, Charlie Munger, Howard Marks, Benjamin Graham, and my friends Mr Amit Pandey, Mr Swapnil Modi. I learn from them; I look at them and try to develop skills into myself. These concepts teach me a lot. Having a hero inspire us to make a decision and act to achieve our desired goal.
10) Teach and you shall receive: the power of giving
When we want to receive something, first we need to give it to others. As a famous saying – Give respect, take respect. So, what we give, we receive it in a multifold.
So similarly, when we teach to those who want to learn then we get more learning in return. With the same mindset, I have started writing a blog so that I can distribute my learning to others and I got multifold learning over some time. I still keep distributing and keep getting back in return. And for that, I am grateful to all the readers.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
It is not necessary that people with decent earning having a Financially literate. And The financially literate person also is not able to create a good asset column. The five reasons are 1. Fear 2. Cynicism 3. Laziness 4. Bad habits 5. Arrogance
Overcome fear
Everyone has a fear of losing money. It is not a problem but the problem is how we handle it and react to it. Whether a person is rich or poor, he does not like to lose money. Sometime and somewhere, the rich person also has lost money. “Everyone wants to go to heaven, but no one wants to die.” when we met a loss then we need to learn from it so that we grow stronger and smarter. We need to learn how to convert losses into profits. We have surrounded by failure. We can fall while walking but we cannot stop walking due to the fear of falling. If we fall then we learn lessons from it and walk again carefully. But we never decide to not to walk. If we want to win then we must have to accept the failure also. We do not only get winning. We must have to be focused on getting success but with accepting failure also.
Overcoming Cynicism
Noise coming from inside us or from outside through friends, media, family, etc. Which disturb us and impact on our decision making and emotional ability.
There are many opportunities available to make money but our doubts and cynicism stop us from doing it. It led us to play safer and that brings us back to the area where we only remain with the poor or middle class as an option.
Loser involves into the criticism and winners involves into the analytical part. The analysis opens our mind and we can also come to know our mistakes if we have made. Also, we can come to know how to improve our correct decision in a better way.
If people directly choose not to lose money without making any analysis then it will start creating an unavoidable problem. And actually, it will become impossible to get money.
We fear failure but many of the successful people become successful after failing for many of the times.
Overcoming laziness
We always staying busy into many of the stuff and avoid an important part of our life. It can be running behind wealth, health, leisure, etc. So that for remains little less lazy, we need to be greedy.
Rich dad believed that the words “I can’t afford it” shut down your brain. After that brain doesn’t have to think anymore. “How can I afford it?” opened up the brain and forced it to think and search for answers.
I can’t afford it close down all the possible doors, and creates a depression. But reversely, how can I afford to open many possible doors, help us to bring a possibility to afford it. This creates a stronger mind.
When our mind stops us, we need to ask to our mind that what’s for me into this? The mind automatically starts working, greed for our betterment kills our laziness. So, greed is good but excess of everything is a poison and we should keep it to the limit.
Overcoming Bad Habits
Our habits make or break us rather our education. If we have a good education but having a bad habit then good education is of no use.
Majority of us first pay due bills and then pay to ourselves if anything left. This is not a habit of rich people. We need to pay ourselves first then to anyone else.
When we pay ourselves first then we have pressure to pay to our creditors. This pressure motivates us to work hard and generate extra income to pay them.
If we have a good money habit to pay ourselves first then we can grow stronger mentally, financially. This is a habit which helps us to grow more.
Overcoming Arrogance
Many times, the majority of people does not know about the money. But they do not tell the truth. Rather we should accept that we do not know it and start finding an expert or a book for educating ourselves.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
I have started with series “Once a darling, now an evil“ is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. This series has received lots of love and recognition. Majority of readers of the series has demanded current darling which can have the potential to become evil. I cannot refuse the request of all loyal readers who keeps on encouraging me. So, on an auspicious day, I am going to start with this new series with all your love and wishes. I am trying to put some of the number-crunching facts by which we can identify ongoing issues in the companies and can save our wealth. I wish this series “Current temptation, Future frustration” also receive all your love and recognition.
I am starting this series with one of the company which is engaged in the business of high-end speciality chemicals, has a 52 weeks low price of Rs.0.95 and LTP is Rs.9.90. This company has rewarded ~10.42x of return in a year.
This company at least earns revenue. 😉 But revenue not growing and even going down year-on-year. Let’s look further because at the lowest price the company traded at Mcap/sales of ~0.15x.
It’s not time to get happy by just looking at the revenue. When we look at the balance sheet then we noticed that the company has higher receivables and inventories.
Receivable and inventory as a % of sales continuously growing with stable payable which will worsen cash flow from operating activities of the company.
Wow…. Let’s drive Volvo and Jaguar with the money of shareholders (the majority of shareholders are very busy and does not have time to look at this).
Advances to suppliers but still confirmation is pending (who will read it and check it, let’s play the game).
Similar to the receivable’s products got sold but they are receivable or not they need to confirm. Wow….
There are lots of related party transactions which can create doubt.
Promoters of the company also reducing stake from the company.
This entire series is based on past available data and ignored the future development in companies and the stock market always looks at the future.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
When we talk about the mindset of rich and poor people then both have a very reverse mindset. Rich people work for learning and poor work for security. These mindsets help to the rich for becoming richer. And poor to poorer. When we spend time for learning, the time we start creating our fortune.
We all focus on getting specialized knowledge to get promoted at the job. But rich dad suggests learning many in the basic. We should focus on every department and learn about all. When we have at least basic knowledge of every department then we get help while we start any of the ventures.
Rich dad valued learning to lead men out from dangerous situations. “Leadership is what you need to learn next,” he said. “If you’re not a good leader, you’ll get shot in the back, just like they do in business.”
If we are working somewhere then also, we need to focus on learning. Learning only help us to grow well. We try to implement what we have learned and if we got failed before the age of 30s then we have a chance to recover. Fear of failure and rejection stop us from acquiring learning and implementing it. It stops us from thinking about how and from where we get new learning. This mindset turns out to be unsuccessful. Our learning will prove more important in the long run to become richer. If we stop learning then we stop ourselves from growing. Learning can lift us in terms of the wise decision, wise person, better growth potential and become richer.
We need to learn the selling and marketing aspects of the business. If we can sell what we are good then we can earn a good amount of money.
For receiving more money, we need to give money also. It is a law of money, the more we give to the needy, the more we receive. It is also detachment from our wealth. The more we get detached, the more we receive back.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
The eleventh part of Series “Once a darling, now an evil”. This series is based on the companies which were once upon a time darling of the market and now, it has wiped out the majority of all those gains. I am trying to put some of the number-crunching facts by which we have identified ongoing issues in the companies and have saved our wealth.
I am starting this part with one of the company is in the business of exports of software and IT related services which has an all-time high price of ~Rs.349 in 2012 and now last traded price at Rs.0.35.
In the first instance this company having huge sales and profit growth. This creates a temptation to buy with missing out of the opportunity. But after the series of articles, we know to not get tempted with sales & PAT growth.
So, we go deeper ….
Good return ratio 😊, Huge debtor days with increasing payable days. I also want to meet an IT platform provider who keeps on giving good credit. (Actually, I want to meet and suggest those vendors to Infosys and TCS for taking services from these vendors because Infosys and TCS do not have such good payable days. It might be possible that this management is much better than the management of Indian leading IT companies.)
I would like to go further detail of it.
If we look at the common size balance sheet then the majority part of the assets side was other assets and that is acceptable in IT firms as they do not have a fixed asset a lot. But here have receivables & Cash are most. Also, cash getting reduces and borrowings getting higher. Where is the cash going? The company might be purchasing assets but as an IT firm, they do not require to have a huge asset.
I dive deep to check the strength of cashflow. I found that cumulative CFO of Rs.291 cr vs cumulative PAT of Rs.674 cr. If we check cumulative FCF then it will be -Rs.38 cr.
Now, if we see the cash flow statement in detail then we can come to know that company has capitalized many assets so that profitability of the company gets boosts but when we see adjust to FCF then it will be different than what we have observed earlier.
If we adjust cumulative FCF with capitalized assets then it comes to -Rs.357.33 cr and what we have observed is -Rs.42 cr from FY08-12.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
Lucky Idiot 