|
|
|
14 |
Growth% |
15 |
Growth% |
16 |
Growth% |
17 |
Growth% |
18 |
Sales
Sales, Revenue is realized when goods and services are sold by the company. Great company generally shows consistently increasing sales figures , growing at a rate of 12-20%.
We can divide company into various types like low Growth, Stalwarts, Fast Growers , Turn arounds , Cyclicals based on its growth rate.
Low Growth - Big Companies which are growing at a low rate , 3 to 5%
Stalwarts - Big companies which are growing at a rate of 12-20%.These are generaly powerful companies with stable business model.E.g Infosys , TCS, Cipla , Sun Pharma , Tata Motors , ICICI Bank etc.
Fast Growers - Companies which are growing at more than 20% annually.These companies are in their early stages , some of them will become Stalwarts , Some of them may not be able to sustain and may become a mediocare company.These companies are most risky to invest in but have the capability to offer maximum returns on investments.E.g Jubiliant foodworks, Thangamayil , Baja Finance, Manappuram Finance
Turn Arounds - Companies which which were doing good earlier but now struggling or Company which were in bad condition earlier but are now recovering can be put in this category.E.g Satyam is a example of company which was struggling in 2009 but it has start showing recovery from 2012.
Knowing the growth type of the company helps us to calculate the potential upside in the investment. For e,g stalwarts may give 20% returns annuals and investment is less risky , on the other hand Fast grower can become a multibagger in span of 3-4 years but he risk is higher.
|
Sales |
10955.14 |
8 |
11936.71 |
-5 |
11295.74 |
15 |
12998.87 |
20 |
15655.85 |
|
Total Income |
11135.55 |
9 |
12178.11 |
-5 |
11520.28 |
14 |
13153.39 |
25 |
16547.44 |
Gross Profit
Gross profit is the difference between sales and the cost of sales.Cost of sales is the cost of raw material and labor used to make the goods or services.It does not include cost like selling and administrative cost, depreciation , interest etc.
GP = Sales - Cost of goods
Gross profit of colgate in 2011 was
GP = sales - raw materials - power & Fuel - Employee Cost - Other Manufacuting expenses
= 2351 - 911 -14-193- 124 = 1109 cr
Great companies show consistently increasing Gross Profit years after years.
|
Gross Profit |
2325.14 |
5 |
2449.81 |
-5 |
2310.94 |
21 |
2797.51 |
20 |
3373.31 |
GP Margin
Gross Profit(GP) Margin = GP/Sales For colgate india FY11 = GP/Sales = 1109/2381 = 45%
GP Margin varies from industry to infustry.Companies in Service industry may have high GP Margin like
infosys has GP margin of 45 , TCS has around 40.
Automobiles companies like Maruti has GP margin of 16-17%.
For Titan it is 20% , as cost of raw material (gold) is very high in this case.
Companies with GP Margin of 40% or better tend to be companies with some sort of durable competitve advantage. GP margin below 20% is a indicator of very competitive industry, where no one company can create a sustainable competitive advantage over others.
Great companies generally show consistent GP margin years over years.You should avoid companies which shows lot of variations on GP margins unless you understand the company business very well and if you have got an edge in the industry.
|
GP Margin =
GP/Sales *100 |
21 |
|
20 |
|
20 |
|
21 |
|
21 |
SGA %
SGA means Selling , General and Admin Expenses
Under which company reports its cost for direct and indirect selling expenses and all general and administrative expenses.These includes management salaries , advertising travel costs . legal fees, commissions, all payroll cost.
SGA% = SGA cost /Gross Profit
Infosys SGA% cost is 16%, Titan 37%, Colgate 42%.Maruti Suzuki 14-23%.
Great companies do not show much variance in SGA cost , you can refer last 5 year data for these companies.
Ideally SGA cost should be less than 30% of Gross profit.
|
SGA % =
SGA/GP * 100 |
0 |
|
0 |
|
18 |
|
15 |
|
13 |
Depreciation %
All machinery and builings eventually wear out over time.This wearing out is recognized on the income statement as depreciation. For e.g a manufacutring company buys building, plant and machinery for 100Cr, assume that life expectancy is 10 years for property , plant and machines. Now (100/10) 10 Cr will be deducted as deprecation amount from income statement.After 10 years company has to buy new building plant and machinery with additional cost.Deprecaition cost vary from industry and tends to be high for manufacturing industry and low for service industry.
Depreciation % = Depreciation/Gross profit.
Cipla has Dep% of 8 , Titan 2-4%, Infosys 5-8%, Maruti Suzuki 14-20%.
Great companies generally have less depreciation and is less than 7-8%.
|
Dep % =
Dep/GP * 100 |
2 |
|
3 |
|
4 |
|
3 |
|
3 |
Operating Profit
Operating profit or operating income is a measure of a firm's profit that excludes interest and income tax expenses.It represent the money which firm makes from operations.
Operating Profit (OP) = Revenue – Operating expenses.
Operating expenses = SGA + Depreciation + R&D Cost.
For e.g Suppose Company A has sale of 100 Cr, Cost of Goods - 60Cr , SGA - 10Cr, Depreciation - 5Cr , R&D expense - 5Cr
Then OP = GP ( Sale - Cost of Goods ) - SGA - Depreciation - R&D expense
= 100 - 60 - 10 - 5 - 5 = 20Cr
Great companies show consistently increasing Operating Profit years after years.
|
Operating Profit |
1103.04 |
3 |
1136.55 |
-19 |
912.94 |
17 |
1070.55 |
51 |
1618.4 |
OP Margin
Operating profit or operating income is a measure of a firm's profit that excludes interest and income tax expenses.It represent the money which firm makes from operations.
Operating Profit (OP) = Revenue – Operating expenses.
Operating expenses = SGA + Depreciation + R&D Cost.
For e.g Suppose Company A has sale of 100 Cr, Cost of Goods - 60Cr , SGA - 10Cr, Depreciation - 5Cr , R&D expense - 5Cr
Then OP Profit = Sale - Cost of Goods - SGA - Depreciation - R&D expense
= (100 - 60 - 10 - 5 - 5 )/100 = 20Cr
OP Margin = OP / sales *100 = (20/100)*100 = 20%
In a given industry , Company With greater OP Margin is supposed to be better as the company is generating greater amount of income from Operations.
For e.g in IT industry Infosys has OP margin of 32-37% , TCS 27-34% , HCL 20% , Mindtree 13%.
In 2 wheeler industry , Hero MotroCorp has OP Margin 11-16 in lasy 3 years whereas Bajaj Auto shows 19-24 in last 3 years.
Great companies show steady Operating Profit Margins years after years and their OP Margin are generally best in the industry
|
OP Margin =
OP/Sales *100 |
10 |
|
9 |
|
8 |
|
8 |
|
10 |
Interest %
Interest expense is due the the interest that company has to pay on the debt present on balance sheet.Company may need debt for working capital or may need additional money for increasing capacity.For this debt , company has to pay interest.This interest expense is deducted from Profit of the company. Interest expense can depend on industry type.Automobilies companies like Tata Motors , Maruti need large plants and machinery and hence debt needs to be taken.
Good companies generally have Interest expense less than 15% of Operating Profit.This is not applicable for Banks and Financial institutions as their business in taking debt at low cost and giving loan at higher interest rate.
Interest % = Interest Cost / Operating Profit
Colgate has interest expense 0-2%, Tata Motors 37% for Fy11 , Titan used to pay 20% of its operating income in debt but now this cost has reduced to 8%. In any given industry the company with the lowest ratio of interest payment to operating income is usually the company with competitive advantage.
|
Int % =
Int/OP * 100 |
7 |
|
7 |
|
4 |
|
3 |
|
2 |
PBT
A profitability measure that looks at a company's profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax.
Good companies show consistent Profit before tax earnings which increases year after year.
Infosys PBT has been increasing at a rate of 18% for last 5 years , for TCS it is 20% , for Colgate it is 17% , for Titan it is 36%. While investing we should looks for companies which have good track of last 5 years earnings before tax.
|
PBT |
1015.93 |
3 |
1055.89 |
-17 |
870.66 |
18 |
1033.42 |
51 |
1570.72 |
Net Profit
Net Profit or Net Income is a measure of the profitability of a venture after accounting for all costs.
Net Profit = Sales - Cost of Goods - SGA - Depreciation - Interest - Tax.
Good companies show consistent Net Profit which increases year after year.
Titan's Net Profit is increasing at a average rate of 34% for last 5 years.For Infosys it is 14% .For Jubiliant foodworks it increased at rate of 100% between 2007 and 2011.
For considering Investment in any given company , please check last 5 years net profit of the company.
Note that if company buy back its shares than its Net Profit may appear less compared to last years but it is very good condition which reflect that company is doing good and it has enough cash to buy back its shares.
You can check if company has bought it shares back by checking number of shares in Balance sheet for previous years.
|
Net Profit |
741.14 |
11 |
823.07 |
-14 |
705.85 |
7 |
761.86 |
52 |
1162.87 |
NP Margin
Net Profit or Net Income is a measure of the profitability of a venture after accounting for all costs.
Net Profit = Sales - Cost of Goods - SGA - Depreciation - Interest - Tax.
NP Margin = Net Profit/Sales * 100
For e.g is a Company is doing sales of 100Cr and Net profit is 22Cr then it NP Margin is 22%.
Infosys NP Margin is 27% , Colgate 15%, Maruti Suzuki 5-7% , Eclerx Services 34% in Fy11.
If a Company is Showing NP Margin greater than 15% consistently for last 5 years then it is very much likely that this company has some competitive advantage.
If NP Margin is less than 10% then company is either in very competitive industry or it is in industry which requires lot of cost on raw material , property, plant and machinary or it may be spending lot of money on R&D.
For e.g Titan has NP Margin of 6%.It is because that main source of Income for Titan is its jewellery business in which the cost of raw material , which is gold or diamond, is very high.So Despite being a Great Company , it has NP Margin of 6%.
NP Margin can very from industry to industry, for e.g Pharma and IT companies has high NP Margin but Automobiles and Heavy Machine industry has low NP Margin. The key is to look for the company with one of the best NP margin in the industry and moreover consistency in NP Margins for 5-10 years.
|
NP Margin =
Net Profit/Sales |
6 |
|
6 |
|
6 |
|
5 |
|
7 |
Equity
It reflects the number of shares that company has issued.We can calculate EPS (Earning per share ) by dividing Net Profit by Number of shares.Here we should see if the Company has issued more shares in the past ,or whether there has been any splits in shares or whther company has given any bonus shares.
Bonus and Split do not have negative impact on shareholders but if Company keeps on issuing more and more shares to meet its capital needs then the company may be in the business which is capital intensive , requires lot of money for meeting working capital needs and for plants and equipments.The Company is generating less cash than what is needed.We should be very cautious in investing these companies.
|
Equity Shares (lakhs) |
8877.86 |
|
8878.00 |
|
8878.00 |
|
8878.00 |
|
8878.00 |
Equity Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend.
We shoud check the dividend history to see if company has been regularly paying dividends to its shareholders. Many companies prefer not to give dividends rather they spend the excess money on future expansions which should be fine till the time the company is able to generate good return on incremental capital invested in the business.
But when we are investing in company for its dividends then we should also check dividend yield.
If face value of Company's share is 10 Rs and stock market price is 800 Rs.
So if a company is paying 100% dividend which is 10 Rs then the yield on dividend will be 10/800 = 1.25% as this is the value which we are getting on our investment of 800 Rs per share.
|
Equity Dividend(%) |
210.00 |
|
230.00 |
|
220.00 |
|
260.00 |
|
375.00 |
EPS
Earning per Share is equal to Net Profit divided by number of outstanding shares.
EPS = Net Profit / Number of outstanding shares For e.g Titan has profit of 600 Cr in Fy12 , it has 88.77 Cr outstanding shares ,so EPS
= 600/88.77 = 6.75 Rs
We should look for atleast last 5 years of EPS figure to check if the company has competitive advantage. EPS is impacted by bonus shares , splits , issuance of more numbers of shares.
Bonus and Split do not have negative impact on shareholders but if Company keeps on issuing more and more shares to meet its capital needs then the company may be in the business which is capital intensive , requires lot of money for meeting working capital needs and for plants and equipments.The Company is generating less cash than what is needed.We should be very cautious in investing these companies.
|
EPS |
8.35 |
11 |
9.27 |
-14 |
7.95 |
7 |
8.58 |
52 |
13.10 |
