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Profits are clustered. ps: (Read More on ROE here - https://www.finnacleshahclasses.com/forum/business-analysis-series/blog-112-primer-on-roe-ek-number-saa-insan-ko-hin-bana-deta-hai-nana-patekar  ) All businesses are not equal, some are tremendously profitable and some businesses perpetually make low returns. As you might have heard the famous quote from Mr. Charlie Munger in which he says “Fish Where the Fish are” which simply means Invest where the profits/Cash Flows are.

In this Post our focus will be on understanding the issues with extracting right estimates of historical Industry sizes & growth. As an analyst needs to take a judgement of future opportunity size while he analyzes a business it becomes extremely important than first to get the right estimates of current & historical industry size and past growth rates. Sounds so simple right open an Annual report - management would have served industry size data on a platter to you. It's a b

If you are given a particular Industry/company to cover what you will do? How are you going to start? What are the things you’ll have to cover to understand the basics of the same? Here are the steps you need to follow to get a quick glimpse of any Industry: Note: Just to be very clear this is NOT called Industry Analysis/company analysis. Please note this is just First step of Analysis i.e. having a brief idea about the industry/company. Step 1. Language of the Sector/busine

As a business analyst its extremely crucial to understand the opportunity size/target Addressable market that's available in front of a company to grow. Everyone wants a big and growing market. Although this term is used directly in the start up space the listed market professional use it in a different way i.e. long runway of growth which simply means company's potential to achieve higher revenues should not get saturated quickly. The companies which are smaller in size, run

In part 2 we understood that a increase in penetration levels, per capita consumptions, organized market share, industry size to GDP % can lead to great growth in an industry and for companies operating within that industry. Let us again present some of the current penetration levels, Organized Vs Unorganized Market, expansion of target market, Industry as a % of GDP etc. in some product categories in India These data point were presented in a brilliant presentation by Oaklan

Well it's technically true that "Risk hai to Ishq Hai" but it's also true that "Kaisa hai yeh ishq hai Ajaab sa risk hai". It's one of the most important job of a business analyst and an entrepreneur to understand what all can go wrong in a business and what's the probability of that event happening. The one way street of only thinking about growths in revenue & profit without understanding the downside a business faces has more often than not resulted in very unpleasant outc

After selecting an Industry or company the first step you need to do is build your sector repository as this will help you for your research. You can’t randomly open any document and start reading. You need to have a clear idea what you are reading and along with this you need to have a clear idea that in what document you get what kind of information. In this particular blogspot we would be discussing a list of resources you need to download and start your research process.

In this blogpost we will discuss various angles through which we can derive the potential industry size and understand the runway available for growth of a business within an industry. First thing first - We should never comment "This company has already grown so much/its market cap has already increased by 5/10 times etc. Hence, now it's not possible to grow further." Let us share some excellent excerpts from a newsletter published by Marcellus Investment Managers. " Some of

After selecting an Industry or company the first step you need to do is build your sector repository as this will help you for your research. You can’t randomly open any document and start reading. You need to have a clear idea what you are reading and along with this you need to have a clear idea that in what document you get what kind of information. In this particular blogspot we would be discussing a list of resources you need to download and start your research process.

With basics in mind from Valuation Post 6 : Drivers of Business valuation Basic Framework Part 1  let’s shift our attention to the key drivers of business valuation. Let's imagine a business in which there is no leverage and no non-operating income/non-operating asset. Hence, ROE=ROCE=ROIC. Note: For detailed thread on ROEVs ROCE Vs ROIC Vs ROIIC click here Now, Let us combine the above framework & help you with derivation of valuation framework. Let's assume the reinvestment

1 - Does lower interest rates Really imply higher valuation Multiples? Key Excerpts " Some say it’s because stocks are simply the present value of their future cash flows. And lower interest rates (r) in the denominator of that equation should result in a higher present value" " Others argue that when bond yields are lower, earnings yields (Earnings/Price) should be lower as well. That’s because investors are said to be choosing between stocks and bonds (they are “competing”

1 - Valuing Holding Companies - 2 Point 2 Capital Key Excerpts "  Holding Companies (Hold Cos) that hold shares of other listed and unlisted companies. A large part of the value of these Hold Cos stems from their stakes in other businesses." " Hold Cos trade at a discount to the underlying Net Asset Value (NAV)" "HoldCos in India are unique because the HoldCo discount is sometimes exceptionally high, ranging from 50-80%" Factors Affecting Holding Company Discount   " Poor Cap

Blog: 1 Only 2 things matter Key Excerpts. Emphasis Ours In this 2-year ongoing pandemic, apart from boom in the stock markets, there has been a big boom in Fintwit (financial market experts – ‘wizards’ they call themselves – on twitter – fondly called fintwit) where everybody and nobody have claimed massive gains given their ‘unique thought process’, ‘clear vision’, ‘in-depth insight into business dynamics’, ‘amazing chart reading ability’. First thing you need to do, as a ‘

As per our last post in Valuation Series (Valuation Post 7: Drivers of Business valuation Basic Framework Part 2)  we understood that ROIC, Reinvestment rate, Cost of Capital, Growth rate, and length of growth period as some of the key drivers of Valuation multiples. In this post we will break some of the assumptions of the basic framework and create various scenarios to understand which situation leads to a fundamentally higher Multiples like P/E or P/B. You might have alway

Before we go deep into the drivers of valuations we have dedicated this blog post on some formulas which explains the interlinkages between few critical financial metrics & valuations of a company. The Formula for growth in earnings is   EPS Growth = Retention Ratio * Return on Equity. This is a PAT level growth formula and this also includes Non-operating/ Non core income. To understand how this formula leads to correct interpretation of growth please see below table.  An im

1. Area of operation: commercial vs residential vs lease model-Affects Revenue cyclicality & margins 2. Reputation in local brokers-Affects Project Booking Advances & Cash flows 3. Target market: Tier 1 city vs tier 2/3 cities, premium projects vs middle/low income vs retirement projects vs clubs/resorts. Impacts: Revenue cyclicality & Unit economics of the business 4. Check RERA for timely project completion: Affects pricing & Bookings Advances 5. Low ready to move (RTM) inv

While watching the great COSMOS series brilliantly narrated by @neiltyson  this clicked us somewhere around the 12th episode of season 1. This set of observations might help you understand what great investors and thinkers like sir charlie munger globally and Prof Sanjay Bakshi in India have been explaining for decades – the importance of multi-disciplinary thinking. Observation 1: It takes much longer than you think Earth is approximately 5 billion years old & the universe i

We all have heard “glass half full, half empty” mindset stories. Recently, something similar happened with the Steel Authority of India (SAIL) valuations. Before that, let’s understand how the business cycle affects valuations. There are two ways to see the value of a company. The market cap of the company indicates the value of common shares, whereas enterprise value indicates the value of the entire company. Market cap = number of outstanding shares * current market price E

The only rule in investing is there's no permanent rule. Reading this you will truly understand why investing is simple but not easy. 1) Crunching basic number like revenue CAGR and ROCEs is just the start not the END of business analysis. (a) Pick up any decade all businesses that generated strong returns ratios a decade ago (2002-2012) did NOT result in superior stock returns a decade later (2012-2022). (b) There will be businesses that delivered superior investment returns

What’s common between shows on Indian television, Equity Markets and a prominent investor Chamath Palihapitiya who for the very good part of the year in 2020 and 2021 claimed that he is better than Warren Buffet! The common element is the surprising and unexpected turn of events twisting the complete plot of the story. Remember the three-time dialogues in Ekta Kapoor serials “Kya, Kya, Kya?” Just when you are extremely sure, even more than god, about the future, the reverse h

In this Post our focus will be on understanding the issues with extracting right estimates of historical Industry sizes & growth. As an analyst needs to take a judgement of future opportunity size while he analyzes a business it becomes extremely important than first to get the right estimates of current & historical industry size and past growth rates. Sounds so simple right open an Annual report - management would have served industry size data on a platter to you. It's a b

Revenue is income/ sales/ turnover of a company, generated from its business operations during the year. It’s the topline of the company (also known as Total Income)  which drives profit after deducting all the expenses. Companies earn revenue in return for the supply of goods/ services. It's the only sustainable source for the company to generate cash to fuel the growth & survival of the business. The most common technique at which the companies are valued is the discounted