Sunday, September 21, 2008

Market is right most of the time

I was wondering about a company named Prithvi Information Systems. The IPO came in Oct 2005 with a price band of 250-270. The company earned decent profit in years 2006, 2007 and 2008. Profit for FY2006 was 54 Cr, EPS 29 and in FY2007 was 90 Cr, EPS 50. Everything was fine till December 2007 but the stock market was not doing anything with the stock. The stock price was hovering between 250 - 400, with a P/E of 5-8 for an IT services company. But the latest result shows huge loss made by the company and the stock has plummeted below a price of 100. The company's revenues are more than 1000 Cr and the market cap is less than 250 Cr, that too for an IT services company, which generally boasts of market cap / sales ratio of more than 5. I am saying that the market is mostly right because if it is always right, as is the assumption of EMT (Efficient Market Theory), there wouldn't be value investors like
Warren Buffet and Seth Klarman. Hats off to the market.
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Friday, September 5, 2008

ROCE

According to Warren Buffet, the best measure to gauge a company is to look at its ROCE - Return On Capital Employed. Unfortunately, ROCE's definition is Profit Before Interest & Tax / (Capital Employed=Total Assets - Current Liabilities). Thus it includes tax + interest. For a company having an ROCE of 20% with 30% of PBIT Tax rate and 3% of CE as Interest burden, PAT/Capital Employed will go down to 12%. He also mentions that you need to deduct interest and tax from ROCE to calculate how much return you get on your capital employed. This doesn't remain constant for a company throughout its life. Bharat forge had an ROCE in excess of 30% till 2005 but it fell to 16-18% after that. So constantly keep watching the ROCE of a company you have invested in. If it falls below 20%, it is a warning sign.
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