I agree. When earnings visibility becomes hazy de-rating happens. Makes sense to stick to ones own circle of competence, where future earnings can be predicted to a extent.
I would like to add one other important point to the list. To check if cash flow from operations matches that of PAT. Lots of micro cap companies have realised our love for earnings & return ratios, they pump up the earnings on the PL account. Only way to verify them is by checking the cash flow statement. There are many which do not match.
They run up in good time but will bite back later.
Ex : Tree house education.
Cash flows did not match PAT. Later ,the issue raised by an NGO on high accounts receivable , crashed tree house’s price to a 52 week low inspite of good growth and return ratios . Though the company came up with a clarification , the issue is still not clear.
Dr Vijay malik’s blog provides a simple tool for analysing the same. Thanks to him.
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