Wealth creators Vs. Underperformers (1/10)

Foreword

In this blog series, we aim to compare companies with growing as well as declining share prices to test the conventional wisdom on financial ratios and financial statement interpretation to throw light on potential opportunities and possible losers.

In this blog we look into two companies, that are far apart basis their performance in stock market.

The picks

Wealth creator: Procter & Gamble Health Ltd

Procter & Gamble Health Ltd is engaged in manufacturing and marketing of pharmaceuticals, bulk drugs, fine chemicals and pigments.

This compay shows a positve .96 correlation between time and stock price since 01-Jan-2007 till 14-May-2020. This very high positive correlation indicates an increase in market price of its equity shares over a period of 13 years and value appreciation for its iverstors.

Hence, Procter & Gamble Health Ltd is considered as wealth creator for its investors.

Underperformer: Aym Syntex

Aym Syntex is engaged in the Business of Textiles. .

This compay posted a negative .97 correlation between time and stock price since 01-Jan-2007 till 14-May-2020. This high negative correlation indicates a declining  equity share price over a period of 13 years and value depletion for its iverstors.

Hence, Aym Syntex is is considered as an underperformer from investors point of view.

Below graph shows where thease stocks stand in the wide spectrum on 2000+ stocks and EFTs listed in Bombay Stock Exhange (BSE),India.

How its stocks performed in the past?

Below graph shows the historical market prices of the stocks picked for further discussion in this blog. Trend line ploted on the graph shows the upward price trend in case of wealth creator and a flat trend in case of underperformer.

Since our endeavor is to find stocks with long term sustainable growth potential, an upward price trend shown by Aym Syntex during a short period of 2014-2015, didn’t alter our view on categorizing a stock as underperformer.

How different are their financial statements?

Balance sheet, Profit and Loss account and cash flow statement are generally referred as financial statements. They act as the primary source of information about an entity’s financial position, performance and application of fund.

Now we analyse previous year’s financial statements of the companies to see how thy are different from each other and what are the common characteristic of a successful wealth creator so that we can use them to find more potential investment opportunities.

Note: Financial statements used are as follows and period differs due to availability of data in our preferred data source.

• Procter & Gamble Health Ltd (Dec-2007 till Dec- 2018)
• AYM Syntex Ltd (Mar-2008 till Mar-2019)

Since we are interested in analysing the difference in characteristic between the companies, varying reporting periods has little impact.

Now, we employee the ratio analysis to study the financial statements and idenfify key differences between wealth creator and underperformer.

Conclusion:

From the above comparative plots, it is evident that the wealth creator company’s performance is broadly outside the danger zone, which is highlighted with red colour in the graphs. However, in case of Procter & Gamble Health Ltd., gradually declining gross profit ratio and recent increases in ‘Operating expense to GP ratio’ are affecting Profit after Tax (PAT) on owner’s equity and it could adversely affect return on equity in the future and the market price of the share.

Another interesting aspect about Procter & Gamble Health Ltd is the declining cash flow from operation, and it could be because of high inventory pileup (increasing inventory holding days) and increase in receivable collection days.

Also, a recent sharp increase in ‘Revenue to Gross plant ratio’, coupled with recent increase in ‘Revenue to Total asset’ ratio in Procter & Gamble Health Ltd suggests either capitalization of Capital Work in progresses or liquidation of non-productive assets. This move could help business to be more focussed on business critical areas and make sustainable profits in future if macro economic conditions are favourable.(Refer declining cash flow from operations)

Another interesting aspect lies in growth ratios in retained earnings. The fluctuating growth ratio to be checked with relevant year’s cash flow statements to see the application of fund. Since the company is virtually debt free, its expansion plans are funded through internally generation surplus fund, which is an amazing thing to be followed.

As mentioned earlier, ratio analysis is one of the tools to shortlist potential investment opportunities. Annual reports published by the company, reports on macro economic conditions and industry news etc., are other sources of information, one can use to finalize an investment option.

Disclaimer:

This blog is not intended to provide advice on investment-related matters of any sort or teach the techniques of ratio analysis etc., It is aims to provide a broad picture about our technial capabilities in data analytics, financial reporting.