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A Glance at Equity & Investment

By Manish Kumar Maheshwari

 

Ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities, in which case it is also referred to as shareholder's equity or net worth or book value. In real estate, it is the difference between what a property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payments on a house). In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account, i.e. the value of securities in the account less any margin requirements.

 

Now let us get practical, absolutely. Equity is an Asset Class which always trends upwards and it always retains its eminence and essence as a slave of earnings. So it does not means that every equity has got the potentiality to mount upwards at isolation. But one can’t simply afford to rule out a fact that what kind of  great Dividend did we had, indeed what kind of Bull Market did we had, I mean our market simply flew from 3000 – 21000 (Sensex). There are couples of things where one has got to look into. First of all, form an Investment thought, having formed an investment thought there are 4-5 things which one should consider:

 

1.Opportunity: Exploitable set of circumstances with uncertain outcome, requiring      commitment of resources and involving exposure to risk i.e. the investment thought which says nobody can be bigger than the opportunity and when I say opportunity that should be attractive, addressable & external. For instance, when one wants to invest in company like Titan, his thinking should be, can Titan become India’s largest specialist retailer?. Will it always occupy a 50-60% share in branded jewellery? Will it always remain a leader in Indian watch industry? Will it enter into other areas of retailing? So this is the basic analysis which one should do. Why I have specifically discussed above about Titan because of the fact that I am aware about Titan’s Management which goes like this.

 

The Sheer approach i.e. the Managing Director told that the task is difficult, but we will overcome it. We have to suck the capital and increase the profits” and that’s what they have done.

 

2. Sustainable Competitive Advantage or Ability: In the Capitalistic economy you can’t deliver a product or goods until and unless you do it in a competitive manner and competitive does not mean the most expensive, the best.

 

3. Scalability & Operating Leverage: Scalability is very important. When Pantaloons went public, the biggest idea was can ten stores become 500? It was written behind a Maruti -- when I grow will I be a Mercedes? Great are the challenges of scalability.

 

Once you've determined your breakeven point, you can use it to examine the effects of increasing or decreasing the role of fixed costs in your operating structure.The large increase in profits as a result of relatively modest increases in sales over the breakeven point, as well as the large increase in losses as a result of modest sales declines below the breakeven point, can be attributed to the degree to which fixed costs contributed to the sales.The extent to which a business uses fixed costs (compared to variable costs) in its operations is referred to as "Operating Leverage." The greater the use of operating leverage (fixed costs, often associated with fixed assets), the larger the increase in profits as sales rise and the larger the increase in loss as sales fall.

 

Tip: The employment of a high level of fixed assets (with fixed costs) at high volume increases the profit potential of a business. At low sales volume, however, losses multiply; and difficulty in meeting your fixed costs, such as payments for plant and equipment, may ensue.

For most small businesses, limiting downside risk is more important than increasing potential profits, so it's wise to keep your fixed costs low wherever possible.

 

4. EVA Positive over Investment Horizon: ECONOMIC Value Added (EVA) may be an old concept but its relevance is gaining ground as companies increasingly look to maximise the intrinsic value of their business.

Focus on EVA positive is not the most relevant focus. It should be on improving EVA relative to long-term expectations. Fundamental value means earning returns in excess of the opportunity cost of capital and how much financial capital is to be exposed to that. Return on capital employed (ROCE) is not the only lever for value creation. There are two important levers - time taken to earn returns and the amount of capital to be exposed towards that. An EVA calculation is ROCE less the opportunity cost in a given period. The journey is intrinsic value maximising and EVA is a means to that end. Quite often measuring EVA becomes the goal in itself. The focus of any new investment certainly should be on earning positive EVA over the life of the investment. But there are large companies which have invested huge sums of money. Whether or not that amount can earn a positive return on capital employed is an academic question because that investment cannot be undone easily. In many situations businesses find that even though they are in negative EVA, they cannot undo the capital sunk. They have to resort to value maximising by continuing with the business and make it less negative EVA.

 

5. Valuations: Last but not the least, Valuations. It’s important what you buy. It is more important what price you buy i.e. it’s not important what you buy rather the important is at what price you buy. Discounted Cash Flow (DCF) is the method Wherein I Personally Believe in. Somebody bought Hindustan Unilever (Erstwhile Hindustan Lever) at an Index of 2900 - the price was Rs 320. When the Index was 7000 - the price was Rs 145.  You bought Hindustan Lever - best quality company, best pedigree and everything and somebody made lot of money by buying United Breweries and McDowell’s at a valuation of Rs 200 crore. There was no corporate governance. He made five-times my money in two-years.   

 

 

 

 

 

 

 

 




Category Shares & Stock, Other Articles by - Manish Maheshwari 



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