PapaDam

PapaDam

11-07-2022

08:21

Few fortnights ago a follower asked me on how to spot opportunities in Equity Markets! Following is my take...this aint a primer....just a logical thought process! And applies to Globally listed firms

Start with 52 Week Low Stocks Reason is Cushion....Safety Net to shortlist things! There are about 50K stocks listed globally and there are on average 250 Trading days....so you can imagine how many opportunities would be in front of you!

Then look at the industry/sector it is into! How many players are there? What are the future prospects of that industry?

Then look at the MIX! Asset Mix Capital Mix Cost Mix

Assets comprises of Tangible/Intangible/Investments/Net Current Assets Capital comprises of Equity/Debt Cost comprises of Raw Material/Manufacturing/Employees/Miscellaneous

Some are research oriented like Biotech or Tech patents or similar types where costs based on accounting treatment either expensed or capitalised.. I wont touch that you can look into that differently on your own on it! Point is it does affect costing or balance sheet in general

Four margins to look into! Gross Margin EBITDA Margin EBIT(1-T) Margin or some consider just EBIT Net Margin

Gross has element of Raw Material and Manufacturing EBITDA has RM/MFG/Employees/Some parts of Misc. Costs EBIT has all of the above+Depreciation w/ CapEx on parallel line to consider Net has all of the above and Interest burden! The residue left for either Reinvesting/Disposal!

Look at the trend of the industry and that of the company what has remain consistent and what hasn't! If the price has touched 52 Week Low means something has happened on Revenues side or Cost side or Balance Sheet side

Other than that nothing can bring it down on its own. Ofcourse if the whole world is falling apart then consider it on externality part But as we are looking into stocks and not markets in general we have to see at the internal side of the company!

Next is whatever inconsistency you have found! Will it get resolved!? No? Dont touch that company just because its cheap or touched the base bottom...just move on! Tu nahi to koi aur sahi! If Yes? What are those? Which side? Topline, Cost or Balance Sheet !

Because every pointer will lead to the Management how they handle things! How will they resolve? Whats their plan? To come out of those inconsistencies be it temporary or permanent! As in a bad phase be it survival threat or existential threat!

As the legendary Peter Drucker once said Only three things happen naturally in organizations: Friction, Confusion, and Underperformance. Everything else requires Leadership! So we all know Leadership = Management!

The reason to take interest is primarily because of the Assets! Not considering the Capital side just assets at the moment! As long as one has assets and one has a strategy what the management needs is just help of Mister Time to come out of the situation which they are in!

Along with Management there are also other things one has to look into...what the sector/industry is going through or how the policies are or how the global trend is for that sector/industry as in "Catalysts" which could help along the way! to understand how things will evolve!

The first cushion which aids the company after raising a bill or selling something is Gross Margin! This Margin is connected to Capital and Assets! Why Capital and Assets? What it has to do with them? Simple

Raw Materials when bought converted to finished goods with the help of machines and kept as inventory and sold at profit affects Margin There's Inventory/Accounts Receivable/Accounts Payable/Asset Productivity Side to it! If one doesnt have cash at hand or stashed for other

arrangements then one has to raise capital for the production/procurement of goods as it can happen the company might not be in bargaining position so Debt and Equity financing also comes into play!

So it takes me to the Balance Sheet to know how the things are financed as in What are the Sources of Funds namely Debt and Equity and in What Proportion?

And what are the application of those funds namely Proportion of the Tangible/Intangible/Investments/Net Current Assets where NCA are Current Assets less Current Liabilities!

How are Assets Financed!? If the business is stable then Long Term Assets can be financed safely with Long Term Debt! If its volatile business better Equity have higher proportion to Total Capital

Now we do know this two type of financing....we also have third one in place which only occurs with subscription or less trustworthy type of business or which has a strong bargaining power

Negative Working Capital driven business....this type of business have cash coming on the very first day...and then revenue is generated! You bring me cash then I sell things to you!

This type of transaction is attached with the term FLOAT. You are now free to utilise cash wherever and whenever you want! So you can either deploy cash for creating new assets (expansion) or retire debt (conservative) or payback to investors (credibility)

This has Returns on Capital attached to it and Growth as well....before you come to a decision as to what to do with the business operations!

If the company has higher Returns then will you need the cash from this float? Yes/No? How much if Yes!? If the company generates lower Returns then what needs to be done with this cash which has come to us a float?

Expansion comes at a price....if you are behind growth thats fine....just raise capital and chase that growth...but if the growth is behind you and you deployed assets and expanded OH MY GOOD LORD I AM ABOUT TO MAKE A BLUNDER...just like the Salt in the Food Problem!

Overexpansion is always brutal....just like Too High GDP Growth is not good as there is over capacity in the making...but Underexpansion thats manageable given the company has access to Markets to raise new capital...thats why low GDP growth has immense opportunity in general!

Baaki ka thoda time ke baad!!! Itna samjha to theek!! Warna bouncer lagaa to khali 0 run mila tum log ko! Back to nets bhai/bahin log!

Spotting Opportunities Dhaaravahik ka Episode Dwitiya! +++

Episode Tritiya! ++++

Episode 4⃣ Question Hour!


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