By P Saravanan and Sumit Banerjee
Of late, Indian stock industry indices have been touching life-time highs on a every day basis. However, some individuals are nevertheless sitting on the fence either simply because they are wary of the industry or do not rather know how to decipher the numbers just before they invest their really hard-earned cash. While we can’t influence the former substantially, we can enable the latter by highlighting how to use numbers to their benefit though investing.
Industry averages
The academic requirements for ratios do not enable right here. A present ratio of 2:1 or a money ratio of 1:1 ought to be relegated to the books. While investing, an investor ought to look at the numbers of the target firm and examine the similar with that of its peers as effectively as the market averages. For instance, the liquidity of a meals delivery firm can be quite higher, and of a building firm quite low. One ought to often examine the ratios with its peers and fully grasp the efficiency and the ratios can’t be interpreted independently.
Cash balance
A company’s money position can be made use of as a ‘cashback’ present though getting shares of a firm. For instance, a money balance of Rs 3 per share of a firm whose shares are at present becoming traded at a value of Rs 10 per share successfully benefits in the net value of Rs 7 per share. So, investors are paying a substantially decrease value for this firm than an identical firm with no money balance.
Debt position
The debt position of the firm is the opposite of the money position. Higher debt on the books indicates that outsiders have a larger encumbrance on the company’s assets. The lenders can also have stringent clauses (recognized as covenants) that may possibly not permit the management to take benefit of riskier possibilities. It also implies that a larger portion of its income goes to serve the debt’s interest. So, typically a decrease debt indicates a superior signal.
Promoters’ share
One critical indicator that aids investors to fully grasp which way the firm is moving is to look at the figure of the promoter’s share. Promoters are privy to info about the company’s prospects, which are not offered to the common public.
So, if the promoters’ share increases, it is a soft signal that the firm is on the path to higher heights and is a superior investment chance.
Cash flows
Profits are the very first indicator that one ought to look at to fully grasp the company’s efficiency. But, they are accrued in nature. Management may possibly handle the profit position by means of their discretionary actions, presenting an inflated image of the efficiency. Investors ought to look at the money flows to see if the management’s actions are supported by the money inflow. An in-depth study of the money flow statement aids to fully grasp exactly where the cash is got from and exactly where it is gone.
Investors ought to think about the above components simply because invariably they make an influence on the efficiency of the firm. As the value that investors are paying today is for the firm’s future efficiency, investors ought to be sure that the firm they are investing in is moving in the suitable path.
P Saravanan is a professor of finance and Banerjee is a doctoral scholar at Indian Institute of Management, Tiruchirappalli