What should you look for in a Company’s Earnings’ Scorecard?

It’s raining numbers with most companies reporting their quarterly and annual financial results. By now some bigwigs like SBI, ICICI Bank, Infosys, TCS, Tata Steel have reported their quarterly and annual earnings. 

It is mandatory for every listed company to disclose their financial results within 45 days of the end of a quarter. At the end of the financial year, a company declares its quarterly as well as its annual financial earnings. 

What do these numbers mean?

You can analyse a company by looking at the earnings scorecard, which is announced at the end of every three months, called a quarter in the financial jargon.

However, these jargons such as Net profit, Net Interest Income (NII), net interest margin (NIM), operating expenses etc can be daunting for a novice investor. 

But these numbers help you understand if the company’s core business is in place, which also gives you an idea if it is worth investing or holding on to the company’s stock. That’s the reason why stock price spurts or plunges following the announcement of the results.

If groping of these financial parameters is not your cup of tea, here is a simpler way out. 

1) Company Action 
Sales, revenue and net profit of a company gives you a bird’s eye view of the financial health of a company. This gives you an idea of how much a company is earning and whether it is on the right growth track. However, if a financially sound or a blue chip company’s net profit or sales shrink, you should look beyond its numbers.  Check if there has been a negative trigger in the company itself or the sector as a whole, which could have dented the company’s financials. 

2) Comparison with Peers

IT Companies such as TCS, HCL and Congizant have reported impressive earnings as compared to their peers such as Infosys and Wipro, despite sluggish growth in IT sectors. 

According to some media reports, a research firm called Gartner mentioned that aggressive sales and marketing helped TCS, HCL Technologies and Cognizant post stronger growth numbers than their peers. Hence even as the sector as a whole may have seen a dull year in terms of earnings, a change in business mix can aid a company outperform its peers.

3) Scan the Big Picture 

SBI’s net profit for the January-March quarter of 2013 dipped 18.5%. But you can’t look at these numbers in isolation. Most public sector banks including SBI have seen a dip in their earnings because of higher provisioning of bad loans. Provisioning means keeping a certain amount of money against a portfolio like a safe deposit. RBI recently hiked the provisioning requirement for restructured/bad loans to 5% from 2.75%, which dented the bank earnings. However, this has impacted the entire banking sector this quarter, which may not be the case in the upcoming quarter. Hence always get the Big Picture right by scanning the financials of the entire sector than just a single company. You can get a low down on the entire sector if you look at the performance of the 3 large companies.

Fall in WPI: What does it mean for YOU?

What was the biggest news this week, which triggered a bull run in the markets? It was the Wholesale Price Index (WPI) hitting a 41-month low at 4.89% in April. Consumer Price Index (CPI) also eased off at 9.39% for the month of April.

WPI vs CPI: What matters more?

Wholesale Price Index (WPI) measures and tracks changes in prices of a representative basket of wholesale goods. In simple words, prices of certain goods were used in the base year to calculate WPI. India uses WPI as the main inflation indicator.

Consumer Price Index (CPI), on the other hand, measures and tracks changes in average prices of a basket of goods and services commonly used by consumers. Some of the items include food, fuel, transportation, medical care etc.

In India we still follow WPI (wholesale price index) instead of CPI (consumer price index), which has less relevance today.

Between the two, the CPI acts more as a barometer of your cost of living. Hence a fall in CPI has a higher impact on your costs than WPI.

While studying the impact of inflation, you should look at primary articles and fuel items as they have a direct impact on your disposable income.

Medical inflation

Medical or health inflation is another indicator you should factor in while building your retirement kitty, which has a direct impact on your healthcare. As per industry estimates, medical inflation has risen in the range of 12-15% in the past two years.
The underlying assumption is that your expenses towards your healthcare needs will be higher as you age. Hence there is a need to build a healthcare kitty, which is sufficient enough to beat this rising inflation

Lifestyle Inflation

Last but not the least is Lifestyle Inflation. As your disposable income increases, you may develop some tastes and desire, which come at a cost. Eating at fine dine restaurants, playing golf, a foreign holiday, watching movies at multiplexes are some examples. This is what you spend on maintaining a lifestyle that you desire; hence it is termed lifestyle inflation. Lifestyle inflation is not a published figure and it varies from individual to individual. Hence you have to take stock of lifestyle expenses, which you will incur in future and make appropriate savings today.

Inflation and Your Money

Inflation gives you an indication of the actual value of your money. Apart from giving an idea about your future value of expenses, inflation has a far-reaching impact on your money.

A rising inflation can act like a double-edged sword. Today it can eat into your savings and tomorrow it can make your savings insufficient for your basic needs.

To avoid this, you should build an investment basket with investments in equity, gold and real estate, which provide a natural hedge against inflation. And you have to factor add at least 8% annual inflation figure to those expenses for its future value while calculating your retirement corpus.

This will truly ensure you have a financially independent life after 60.

Challenges for Today’s Retail Investors

Retail investors face two major problems today. One is lack of financial literacy and the other is shortage of cash.

Due to financial illiteracy they are unable to understand what is happening in the market? Why are the reasons and the factors that affect the market? If an investor has the sense to understand and judge at this juncture, they don’t have adequate cash reserve to make use of opportunities. While dealing with equities retail and small investors must keep the following points in mind: -

a) There are numerous business channels that have their experts’ panel. They give trading ideas with typical terminology like “CREATE POSITIONS” with frequently using words “VERY SHORT”, “SHORT” and “LONG”. You might not understand these words and their meanings.

(b) You need to invest at regular intervals.  You can purchase stocks in smaller quantities such as 20, 30, 40 and so on. It will make you understand how your decision is performing in market, which can give you a good judgement.

(d) Suppose you had purchased stocks of some company thinking it is wise investment and your decision turns wrong and stock corrects by 5-10%. Don’t immediately run to average your price. Let it fall. After sometime it will take upward turn, this is the time to purchase more stocks and average the price.

(e) You many not understand the reason behind the diminishing value of your portfolio. You may not be understanding this financial jungle. But after sometimes prices move upward and so will the portfolio value. Don’t immediately run to take profits. As you didn’t understand why prices were falling, you will not understand why prices are moving upwards. Wait for some more time to have good profits.

(f) It is not necessary that you make profits from every investment. Sometimes retail investors pour their hard earned money in companies, which are never heard off. These companies take care off only of promoters not investors. So, average your prices and take away whatever small profits you are making.

(g) You should deal with Mid and Small Cap companies with utmost care. Lots of recommendations are given on these stocks especially in the boom market. These recommendations go wrong sooner or later. Prices of these companies’ stocks head northward and southward with the same speed. The best example is when Mid and Small Cap companies’ stocks witnessed 30-50% correction whereas Sensex had corrected only 10% in April 2013.

(h) Stock market works around the principle of “Patience Check Meter”. So have Patience and let corrections happen in market. This is a great opportunity to pickup stocks.

Guest Blogger's Name: Nitin Gupta

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Invest in FDs or Dynamic Bonds NOW before Rates fall in FUTURE

As expected, the Reserve Bank of India (RBI) has cut the repo rate by 0.25% in the annual monetary policy review announced today. The repo rate is the rate at which the RBI lends to commercial banks, which is now pegged at 7.25%. However, the cash reserve ratio (CRR) is kept unchanged.

The rationale behind this rate cut is to step up the deceleration in country’s growth. As RBI mentioned, the growth has to 4.5% in the third quarter of last year, 2012-13 from 9.2% in the fourth quarter of 2010-11.

Hence the underlying assumption is that this rate cut will make loans cheaper thereby triggering the economy’s growth.

But a fall in interest rate on loans implies a fall in deposit rates as well, which is not the best news for investors who are already dealing with volatile equity markets and gold prices. But you still have some scope to mitigate the impact of a likely rate cut on deposits.

Here is how you can save yourself from a likely dip in FD interest rates.

1) Avoid the the re-investment risk
One has to wait and watch if the banks cut interest rates with immediate effect. However, all macro economic factors and spate of rate cuts in previous RBI policies indicate that the rate is likely to go down in future. Hence, you should consider opting for a longer tenure fixed deposit if there is no immediate financial requirement. This way you can avoid encountering the “reinvestment risk”.

The term re-investment risk describes a situation in which you will have to settle for lower interest rates on FDs when the deposits come up for renewal.

For example, you may opt for a one year fixed deposit since the rates are 25 basis points higher than a fixed deposit of 1-3 years. But when you reinvest the money after 1 year, the deposit rates then may be much lower than the rates offered by banks and companies now.

Hence it certainly makes sense to invest in long-term FDs of a tenure of five years or more.

2) Split the money among multiple FDs
FDs are best bets for dealing with financial emergencies. Keeping this in mind, you can split the money into 2-3 FDs of different tenures to avoid the re-investment risk. You can keep a smaller amount in a 1-year FD and higher amounts in 3-5 year FDs. In an event of emergency you can break one FD, ideally the one with the lowest tenure, and pay a penalty or lose interest only on that amount. The other larger amounts locked in for higher tenures will stay intact. This approach will help you combat the reinvestment risk and accumulate interest on a long tenure FD.

3) Stay afloat with Dynamic Bond Funds 
Dynamic Bond funds, gives you the flexibility to move your money from short-term into long-term or vice versa based on the fund manager’s outlook on interest rates. Thus these bond funds are well poised to deal with volatility in interest rates. So now with interest rates likely to fall, the fund manager will ideally move the money into longer tenure bond such as corporate bonds or government securities. One of the biggest advantages is that a competent fund manager will be handling your investments