Tuesday, December 23, 2008

What affects a business the most in long term?

After spending some three years in Stock Market and studying balance sheets of a lot of companies and also their profit and loss account of last ten years, I found that there are two things that affect profitability of a company the most:
1. The competition
2. The product/service offered by the company becoming obsolete

The first example is seen in most of the commodity companies. But some companies which are not in commodity can see the same fate as other commodity companies after some time. The example can be seen in Bharat Forge. For a very long period the company maintained its ROCE and keep growing at a good pace as can be seen in the financial results as below:











YearSalesNet Profit
2001487.9632.64
2002434.4522
2003644.9581.09
2004851.14124.9
20052001.375201.088
20063085.013250.542
20074275.213290.588
20084751.57301.523


Company had an ROCE of more than 25% till 2005. But things started deteriorating after that and now it stands less than 15%. ROCE clearly shows how competition is affecting the business. When you invest in a company for a long term, keep looking at the company's ROCE. If it starts deteriorating, get out of your long term investment.

The second example can be easily seen in some IT company e.g. Moser Bear. The results below shows that the company was making a good amount from its business till 2004.

















YearSalesNet Profit
199533.84.2
199642.78.1
19976010.6
199871.813.2
1999101.320.4
2000154.844.1
2001383.92137.65
2002738.96211.66
20031024.6232.92
20041582.39328.83
20051434.8559.79
20061774.97-6.4721
20072060.65278.827
20082001.22-79.259


What happened in 2005? The CD-ROM prices crashed from INR 30 to INR 8. Can you expect this in say HUL's Surf? or Nestle's Maggi? Never ever.

While investing, if people keep in mind these two factors, the investment operation will be very rewarding.
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Wednesday, December 3, 2008

What a single stock can do to Sensex?

Looking at the weightage of stocks in Sensex at BSE, I conclude that
Reliance (13.65) > Ranbaxy + Tata Motors + Jaiprakash Associates + ACC + DLF + M&M + Hindalco + Grasim + Sterlite + Maruti + Wipro + Reliance Infrastructure + Tata Steel + Tata Power (13.28).

Thus if all these 14 stocks go up by 3% and Reliance goes down by 3%, the impact on Sensex is still negative. This is not the case with Nifty since Nifty considers Full market cap instead of Free Float. Full market cap of these 14 companies is 1.83 lakh Crore whereas that of Reliance is 1.69 lakh crore.
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