Qualitative factors can be ascertained through management interviews or con-calls or investor presentation or management discussion and analysis reports.
Elearnmarkets.com
All of us want to create wealth from the stock market especially when the market looks geared up for a rise after the recent General Elections.
But, instead of being caught on the wrong foot, it would be prudent for us to do our homework well before investing in any company.
Thus, let us understand what we need to check for finding a good company. So, for this, we need to check on the Qualitative and Quantitative aspect of any company.
Qualitative means the factors which cannot be measured in numbers but can just be envisaged or felt or arrived at.
Thus, qualitative factors can be ascertained through management interviews or con-calls or investor presentation or management discussion and analysis reports.
Business Model
One needs to understand what a company does. What is the manner in which the company does its business? How does it earn money? Is it a cash-rich business or a cash-intensive business?
What is the product it manufactures? What is the demand of the product, etc.? If everything is positive then one can ascertain that it is a good company.
For example. Pidilite Industries is into a monopoly business.
Corporate Governance
It is very important to know how the company is run. Are all the ideologies of the company investor-friendly or not? Is the company abiding by the rules and regulations laid down by the company act? Is the company into any legal tussle?
If you get all supportive answers then you can rest assured about good governance.
For example, corporate governance of the Bajaj group is strong.
Management
Is the management efficient in running the company? Is the management dynamic? Can it adapt to the changing dynamics? Does the management keep its promises?
Is the management investor-friendly? Does it have in-depth knowledge of what it is doing?
If you get positive feedback about the management then you need not worry much about the company.
Comparative Advantage
Does the product manufactured have many or few competitors? Can it stand against the competition for a longer period of time, or is it unique?
If all these answers are met up to your expectation then you can rest assured regarding its qualitative aspect.
For example, Amul is in an advantageous position over other players in the dairy sector.
Industry
We need to check if the company’s growth is in line to the Industry’s growth. It is better off if it surpasses the Industry’s growth. Thus, we need to check on percentage growth of both the company and the Industry.
For example, Indigo is way ahead of its Industry.
Customer
If a company has many customers for sales, its risk is diversified. But, if it relies only on a few customers for its sales, the business carries more risk. Thus, it is important to know whether the business is diversified or not.
For example, Hindustan Unilever has a diversified customer-base.
Competition
If the company faces huge competition from its peers then that would result in low profits for the company. If there are many players in the same Industry, it becomes difficult for a company to increase its market-share or raise prices owing to huge competition.
One example could be Telecom Sector companies.
Financials
The financial statements like Income statement, Cash Flow statement and Balance Sheet tell us about the financial health of any company. It tells us whether or not the company is profitable and whether the financials look promising or not on its future earning potential.
- It tells you whether the company has been able to increase its sales and profits on a quarter-on-quarter (QoQ) basis or not.
- Whether the margins of the company is rising or not.
- If the company is able to increase its sales and profits with good control over its expenses or not.
- If the income statement is seeing good overall growth or not on an annual basis.
Once ascertaining all these criteria, it will help you take a wise investment decision.
The Balance Sheet gives you an outlook on the change in Assets and Liabilities of a company on a year-on-year (YoY) basis.
- If the liabilities like debt burden or Account Payables increase then that raises a cause of concern for the company for its liquidity and cash flow.- Similarly, if the accounts receivables in the assets increases, that too cautions the investor of payments coming late to the company creating stress in liquidity.
- Thus, in the balance sheet, we need to understand whether good assets are increasing or bad liabilities are increasing.
- This can be ascertained with one golden formula. Increase in liabilities is directly related to an increase in cash or vice a versa, and increase in assets is inversely related to cash.
- Cash decreases with increase in assets. Thus, we need to check whether this increase is internally funded out of the business or funded through borrowed money.
The Cash flow statement gives you a snapshot of the cash or the liquidity position of the company.- If the operating cash flow that is profit from the business is positive then it is positive for any company and vice a versa.
- If the financing cash flow of the company is positive, that means that the company is able to efficiently utilise its cash for the growth of the company.
- The investing cash flow of the company should be negative as the company is increasing its assets, thus the decrease in cash to propel future usage of the assets to increase efficiency.
- When the company can generate positive cash flow from its business, it points to good future growth projection for the company.
- Cash flow is a very important metric to understand the longevity of the business.
Bottomline:
- If we analyse the company on its qualitative and quantitative aspect, we can invest in a company with confidence.- The Income statement is the report card of the day-to-day operations, so it needs to be minutely scrutinised.
- The Balance Sheet is the annual result of any company. Weakness or strength can be ascertained from its assets and liabilities.
- The cash flow is an important metric to give the detailed liquidity prospect of any company, which is a measure to ascertain its future growth prospects.
(The article is sourced from Kredent InfoEdge)
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