Results date and management commentary tell a lot about a company
The September quarter earnings season is now behind us and weighty analyses of corporate performance have also subsided. But retail investors and day traders are still confused about the course of the stock market. They are yet to figure out what to do, whether to buy or sell, in a market that remains range-bound and volatile.
But few recognise that just by being alert in an earnings season one can become a smart investor, with or without the help of research reports.
For that one has to learn some simple basics of investing first.
The most elementary technique of good investing is finding a good business sector. One can find this from general reading and observation. Once the sector is identified, find out which company is run more efficiently and prudently than its peers. This can also be found out through reading and observation.
Day traders have to go little further and figure out how the changing fundamentals of a sector, or the economy, would impact their day trade. To illustrate, if a day trader learns that interest rates are to go up and that would affect auto sales, he has two options. Either take a short position in Maruti Suzuki futures and pocket, say, Rs 200, or take a longer-term positional trade that would fetch him at least Rs 2,000 in less than a month. A smart trader would opt for the latter.
It is not necessary that a good investor should have the ability to understand balance sheets and company fundamentals. But again, a little observation will do the trick for you.
The first step is to keep one’s eyes wide open in an earnings season. As we have discussed in this space before, good and relatively better performing companies tend to declare their results at the start of an earnings season. Companies that do not have much to show off tend to wait for the end of the season to declare their working results. They also try to declare the results on a day a host of companies announce their numbers, so that their results do not attract attention.
Also, a company that does not want attention declares its results very late in the evening, say at 9’o clock. By the time the exchange filling is picked up by the media, or the media release is sent, most business newspapers would have scheduled their news stories for the day. This will ensure the company’s results get no attention or get only a brief mention. Furthermore, none will have the time to analyse the results. It is no surprise that the largest listed real estate company has been announcing its results very late in the evening ever since its performance had started going downhill.
In contrast, a good company, with efficient management information and accounting systems, would surely be in a position to declare its results in the first fortnight of the earnings season. This has nothing to do with the company size. Look at the size of Infosys and TCS. They are mammoth in scale of operations but they still declare their quarterly numbers at the start of the results season.
It is not that they do this because of the technology advantage. Today, when companies are run on IT systems, even a large financial services company or a metal or petrochemical company can collect data in a matter of minutes and assimilate the results in a short time-frame. In fact, many big manufacturing companies do declare their numbers early in the season.
Sometimes results are delayed to suit the interests of the management or the promoters. The results are often adjusted according to the market conditions. There are enough loopholes in accounting laws that leave companies the scope to tailor-make their quarterly numbers and managements often misuse these gaps.
Also, when the market is bullish, more companies tend to declare their numbers in the early part of the earning season. In a bearish phase, more companies tend to declare their results toward end of the season.
So, as a preliminary step, an investor should start tracking the results dates of companies in the identified sector.
The next task is to read the first few paragraphs of the annual reports of companies. While good companies do refer to the global economic and demand scenario, bad managements also hide behind the global factors to cover up their inability to deliver. They start by blaming the global economic environment and their first few paragraphs, in management discussion or director speech, would read like a treatise on the global macroeconomic scenario. The funniest part is that the operations of some of these companies have nothing to do with the global economy. When a company looks for excuse, better walk away from it. Even when global growth improves, they will find another excuse to justify their non-performance.
There is yet another set of companies. When the equity market is bullish, the director reports of these will go overboard to convince how the global conditions help these companies grow. Many of them will also project an enticingly rosy picture of the industry with multi-billion dollar, or even trillion dollar, global opportunity. However, scanning the balance sheet further down will show that mid-sized company has been in operation for decades in the so-called gigantic global industry but its annual revenue is still below Rs 300 crore. What global advantage is it going to grab in the next few years?
By comparing the balance sheets, which are available on stock exchange websites and company portals, an investor will get a fair idea how honest the company has been in stating its facts in bull phases and in bear phases.
So, even if one cannot make head and tail out a profit and loss account, one can certainly comb through what the company has been communicating through its annual reports. And this is a good enough indicator for one to forma an opinion about the company.
(Rajiv Nagpal is consulting editor, Financial Chronicle)