-
8/12/2019 Guidebook_ Interpreting Company Results - Yahoo India
Finance
1/3
Wed, 12 Feb, 2014 9:02PM - Indian Markets are closed
Guidebook: Interpreting company resultsBy Mail Today | Yahoo!
Finance India Mon 8 Aug, 2011 3:41 PM IST
You will soon be flooded with another set of quarterly numbers
in October. Here is how to make sense of them
If you are a shareholder you must be anxious to know what's
happening in the company whose shares you hold and how it
has been performing.
One of the ways to find out is to look at the quarterly numbers
published by companies.
Quarterly results are the window made available to the general
public to understand the company's performance. These are
produced in a predefined format that a company must adhere
to.
According to the market watchdog, Securities and Exchange Board
of India ( Sebi), guidelines it is compulsory for every
listed company to produce quarterly results.
Quarterly results are early indicators of the company's progress
towards its projected yearly profit targets. Have you had a
look at the results of the companies whose share you hold? May
be you have. But did you go beyond looking at the net profit
figures. If you are one of the millions who are not expert at
reading the numbers, the chances are that you did not.
From an investment point of view, zeroing on net profit may not
give you the right picture at a given point. This is because
there are certain deductions that may ' artificially' eat away
earnings leaving nothing on table. It happens when deductions
such as depreciation, tax or amortisation is taken into account.
This eventually shows up as a ' technically' loss- making
enterprise but it may not be the true picture.
Alex Mathews, head of research at Geojit BNP Paribas Financial
Services, says, " Investors should look not only at the net
profits figures but also other details like sales growth, debt
structure, whether the net profit growth is due to any one time
gain and reasons for increase or decrease in expenditure."
Though, it is not easy to analyse numbers like a professional
would do but even a lay person can go beyond the net profit
figures to try and gauge what's happening in the companies. Sowhat
should you look at while reading the quarterly results put out by
the company? We give you a snapshot of some of the
more important parameters that you should look at and what they
mean.
Other than net profit, there are few more terms such as gross
sales, net sales, expenditure, operating income and earning
per share ( EPS) that can help you to get a better
understandings of where the company stands.
GROSS SALES:
Gross sales are also called as the ' topline' or revenue or
total sales. Samar Vijay, director, InvestCare, says, " A
consistent
increase in the topline shows strong growth in business.
However, the quality of topline needs to be examined.
Sale of fixed asset can increase the topline, which should not
be confused for strong growth. This can be verified from thebalance
sheet where fixed asset will show a reducing pattern." Gross sales
are the sum of all sales during a given period.
NET SALES:
From gross sales you can derive net sales by deducting sales
return, sales allowances, and sales discount from gross sales.
OPERATING EXPENSES:
These are expenses that arise during the course of running a
business. Operating expense consists of items such as salaries
paid to employees, research and development costs, legal fees,
accountant fees, bank charges, office supplies, electricity
bills, business licenses.
OPERATING PROFIT:
When operating expenses are deducted from net sales you get the
operating profit, or earnings before interest, tax,
depreciation and amortisation ( EBITDA).
Sanjeev Zarbade, vice president ( private client group
research), Kotak Securities says, " Operating profitability
reflects
http://in.finance.yahoo.com/news/provider-yahoo-finance-india/http://-/?-http://in.finance.yahoo.com/http://in.finance.yahoo.com/http://-/?-http://in.finance.yahoo.com/news/provider-yahoo-finance-india/
-
8/12/2019 Guidebook_ Interpreting Company Results - Yahoo India
Finance
2/3
ongoing business conditions and shows how efficiently the
management is running the business."
NET PROFIT OR NET INCOME:
In the income statement you can find details about tax and loan
repayment which when deducted from operating profits
gives you the net profit. The term net profit or net income is
popularly known as ' bottomline', which shows the company's
net earnings or losses.
EARNING PER SHARE ( EPS):
It is the amount of earnings per outstanding share of a
company.
Outstanding share refers to those shares which are trading in
the market. EPS is arrived at by dividing net profit by
numbers of share outstanding.
Rajesh Jain, executive vice president and head of retail
research, Religare Securities, says, " Rising EPS is a good sign of
a
profitable company." In the quarterly results you will find the
term basic and diluted EPS. Basic EPS is the total earnings
per share based on the number of shares outstanding.
On the other hand, diluted EPS is used to gauge the quality of a
company's earnings per share if all convertible securities
were exercised. Convertible securities refer to all outstanding
convertible preference shares and convertible debentures.
Unless the company has no additional potential shares
outstanding ( a relatively rare circumstance) the diluted EPS
will
always be lower than the basic EPS. EPS also helps you to
calculate price- toearning ratio or P/ E ratio.
The P/ E ratio of a share is a measure of the price paid for a
stock relative to the annual net income earned by the firm per
share. In general, a high P/ E suggests that investors are
expecting higher earnings growth in the future compared to
companies with a lower P/ E. Price- to- earning need to be
compared with peers to find out relative valuation. A low P/ E
compared to peers trading at high P/ E makes the stock a better
buy at times.
INTEREST COST:
It is the cumulative sum of the interest paid on loans by the
company.
" Rising interest cost depicts that the company has increased
its debt. However, proper deployment of debt is important
along with rise in sales and profit otherwise rising interest
will eat the profitability of a company," says Jain.
APPLE TO APPLE
A single set of numbers will not tell you much. You need to
compare it with the prior periods to gauge the direction the
company is taking. There are two methods to compare the
quarterly performance, that is, quarter- on- quarter ( QoQ) or
year- on- year ( YoY).
QoQ is a comparison of a quarter just prior to the current
quarter. For instance a comparison of the quarter ended March
2011 with the quarter ended December 2010.This is also known as
sequential comparison.
However, YoY is the comparison of the quarter with the
corresponding quarter a year ago such as comparison of the
quarter
ended December 2010 with the corresponding quarter ended
December 2009.
R. Murali Krishnan, head ( institutional broking), Karvy Stock
Broking, says, " YoY is used to measure the direction and
consistency in performance.
QoQ reflects the nearterm pressures on the company and gives an
indication on it abilities to achieve its long term
projections as estimated by the consensus in the YoY." Kaushik
Dani, head ( equity), Peerless MF says that sectors which are
prone to seasonal or cyclical fluctuations should be compared
YoY and those that are not, should be analysed QoQ or
sequentially. Sectors like FMCG, retail, cement, auto and
infrastructure can be analysed on a year- on- year ( YoY)
basis.
Similarly, growth in sectors like technology and telecom should
be compared on a sequential basis.
TACKLING SUDDEN FALLS
In some cases the net profit of companies shows a sharp and
sudden decline during a quarter.
Recently, the bottomline of State Bank of India ( SBI) for the
quarter ended March 2011 tanked around 99 per cent to `
20.88 crore against ` 1,866.60 crore in the corresponding
quarter of the previous year. However, the stock price of the
company declined around eight per cent from ` 2,413 on May 17,
2011 to ` 2,236 on May 30, 2011.
-
8/12/2019 Guidebook_ Interpreting Company Results - Yahoo India
Finance
3/3
In other examples, Shipping Corp of India ( SCI) registered a
net loss of ` 6.17 crore, down 104.54 per cent in the March
2011 quarter against ` 135.85 crore a year ago. During the same
quarter, net profit of Sterlite Technologies dipped 85.73
per cent to ` 10.30 crore against the corresponding quarter a
year ago.
However, the share price of SCI declined barely 1.85 per cent to
` 100.90 while Sterlite Technologies declined 20.21 per
cent to ` 48.35 till June 24, 2011.
As you will see, share prices in the above three cases reacted
differently to the sudden fall in profits. Hence, there is no
standard yardstick to gauge the impact of such a fall.
A chance of a stock declining after a net loss or vice versa
depends on the anticipation of investors and how the results
have
matched their expectations. If investors believe that it is a
short- term phenomena, markets ignore the sudden drop in profit
or revenue.
" It is not necessary that a stock will fall after a sudden fall
in the quarterly numbers. It is all a function of street
expectations.
If the street is expecting a loss and actual loss is lower than
expected, then the stock price can actually move up," Sanjeev
Zarbade of Kotak Securities added.Sometimes, long- term
investors take advantage of short- term negative sentiments by
taking long positions causing a fall in the price of a
share.
However, if the long- term outlook is bad for the company, then
both short and long- term investors should move out.
TRADING ON NUMBERS
So, should you buy or sell on the basis of the numbers put out
by the company? Our advice is that generally you shouldn't
unless you are certain about the direction that the company's
business is taking.
There are many other factors such as the business environment,
plans and the fundamentals of the companies that one
should take into the account while buying or selling.
D. D. Sharma, senior vice president- research, Anand Rathi says,
" Do not take buy or sell decision on the basis of quarterly
results only.
Investor should check other factors such as policies of the
company and other fundamentals of companies."
The chance of a stock dipping after a loss or vice versa depends
on investors & how the results match expectations
THINGS TO KNOW
HOW EPS WORKS?
In simple terms, earnings per share mean ( EPS) is how much a
company is earning in terms of shares that they have been
floated in the market. For example, if a company makes ` 20 lakh
in profit and has 5,000 outstanding shares, the earnings
per share would be:
EPS IS CALCULATED AS FOLLOWS
Net earnings/ outstanding number of shares OUTSTANDING NUMBER
SHARES are the number ordinary shares that,after their issue, have
been sold to and are held by shareholders.
P/ E RATIO
P/ E ratio is calculated by dividing the current market price of
a share by the annual earning per share. A high P/ E ratio
suggests that investors are expecting higher earnings growth in
the future compared to firms with lower P/ E ratios.
The ratio needs to be compared with peers to determine the
relative valuation.
AMORTISATION
Amortisation means paying off a debt in regular installments
over a period of time or the deduction of capital expenses over
a specific period of time ( usually over the asset's life)
