May 15, 2020

Common Pitfalls In Judgment While Analysing Companies & Economics In General

General Money   || Personal Finance   || Stock Markets  ||  Real Estate ||

Not all companies may want to go debt free, as it increases the tax payable component. Similarly, not all companies may want to have debt, they wish to be debt free on their balance sheet – so that they can project their outlook based on these merits to the market & their media contemporaries – on the lines of being a debt free company! Well, there could be companies which has a way of raising capital at relatively cheaper rates & would wish to maintain it that way & concentrate more on increasing their operating margins! So the outlook company has plays an extremely important while you judge on your investment decisions!

Analysing this from profitability perspective – Some companies which were very comfortably placed & also posted consistent profits may now look to utilise ‘bear phase /downward phase of the market’ as an opportunity to optimise their loss-making entities & may seem relatively ok – to even post losses owing to this clean up. This could be with normal belief that when there is total negative air in the economy in general, any positive aspects of the company could go unnoticed – so during these times the companies can prefer to clean out balance sheets.  These kind of balance sheet clean up’s are part of every business operation cycle & this shouldn’t keep the investor away. Remember these are opportunities which comes in disguise, which you should be ready with open hands to bag it & make it part of your portfolio.

Similarly taking judgement calls purely based on price action of stocks of companies could be equally deceiving. Price of stocks move based on varied factors & not just based on fundamental factors. If you are vivid stock market observer you would notice most times – companies profit numbers would have tanked bottom, their sales would have gone lower, operating margins have sharply declined – but still stock prices would be going up consistently.

To consider an example of banking sector – RBI May give free hand to Banks to give loans to boost MSME Sector (Micro Small & Medium Enterprises). Well, now lets analyse the same from MSME perspective – success of MSME sector depends on revival of consumption in the markets so that they are able to sell what they produce! Also biggest challenge for MSME sector is keeping employees intact by paying them salaries to employees even while they are away from work. Payment of salaries come under working capital – so given this situation MSME could be exhausting working capital by paying salaries with zero production output. So even if lockdown settles, production begin full fledge – with out revival in consumer demand, it will lead to pure build up in inventory levels with products going unsold.

Now let’s consider some positives which seem to be negative going by general hypothesis. Chinese economy looks to have picked up, movement of goods & people seems to have picked contributing to increased traffic on roads. Now we all know China consumes closer to 25% of oil produced in the world & this may ultimately lead to increase oil demand across the world. On the flip side – everybody say Chinese economy is ready & its manufacturing has resumed to normalcy – Well – think for a minute, isn’t this something like saying shop is ready & open for business but where are the buyers in the market is an important judgement call one needs to take.

Continuing with the positives in Indian markets – some current sentiment could also turn out to be very positive for the auto sector. There could be section of people may strongly prefer using personal transport – two wheelers & small cars to comply with social distancing rather than using public transport.

Hope above examples of analysis would help in the way one can look at things. Drawing varied perspectives, always helps. Always make sure to invest in what you can understand & constantly build on a passion to learn about the sector you are investing into.


–    Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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