What should you look for in a Company Earnings Scorecard?

Its raining numbers with most companies reporting their quarterly and annual financial
results. By now some bigwigs like SBI, ICICI Bank, Infosys, TCS, Tata Steel have reported
their quarterly and annual earnings.

It is mandatory for every listed company to disclose their financial results within 45 days of
the end of a quarter. At the end of the financial year, a company declares its quarterly as
well as its annual financial earnings.

What do these numbers mean?

You can analyse a company by looking at the earnings scorecard, which is announced at the
end of every three months, called a quarter in the financial jargon.

However, these jargons such as Net profit, Net Interest Income (NII), net interest margin
(NIM), operating expenses etc can be daunting for a novice investor.

But these numbers help you understand if the companys core business is in place, which
also gives you an idea if it is worth investing or holding on to the companys stock. Thats
the reason why stock price spurts or plunges following the announcement of the results.

If groping of these financial parameters is not your cup of tea, here is a simpler way out.

1) Company Action

Sales, revenue and net profit of a company gives you a birds eye view of the financial
health of a company. This gives you an idea of how much a company is earning and
whether it is on the right growth track. However, if a financially sound or a blue chip
companys net profit or sales shrink, you should look beyond its numbers. Check if there
has been a negative trigger in the company itself or the sector as a whole, which could have
dented the companys financials.

2) Comparison with Peers

IT Companies such as TCS, HCL and Congizant have reported impressive earnings as
compared to their peers such as Infosys and Wipro, despite sluggish growth in IT sectors.

According to some media reports, a research firm called Gartner mentioned that aggressive
sales and marketing helped TCS, HCL Technologies and Cognizant post stronger growth
numbers than their peers. Hence even as the sector as a whole may have seen a dull year
in terms of earnings, a change in business mix can aid a company outperform its peers.


3) Scan the Big Picture

SBIs net profit for the January-March quarter of 2013 dipped 18.5%. But you cant look at
these numbers in isolation. Most public sector banks including SBI have seen a dip in their
earnings because of higher provisioning of bad loans. Provisioning means keeping a certain
amount of money against a portfolio like a safe deposit. RBI recently hiked the provisioning
requirement for restructured/bad loans to 5% from 2.75%, which dented the bank earnings.
However, this has impacted the entire banking sector this quarter, which may not be the
case in the upcoming quarter. Hence always get the Big Picture right by scanning the
financials of the entire sector than just a single company. You can get a low down on the
entire sector if you look at the performance of the 3 large companies.

Will Rain Gods inspire the Stock Market this year?
Monsoon has arrived. According to news reports, the Southern belt of the country has
recorded higher than average levels of rains in the first week of monsoon. This could cheer
certain sector stocks, which are currently reeling under the pressure of weak rupee, poor FII
inflows and rising deficit.

June marks a very important month for the stock market. It gives an inkling on the future
trend of the monsoon.

Monsoon and Market Saga

The co-relation between monsoon and the stock market may have weakened over the years
as there are other national and global factors, which the stock prices.

However, India continues to be an agrarian economy and almost 60% of the farmland are
rain fed. Hence good monsoon is a pre-requisite to the economy growth, which in turn
impacts the stock market.

Hence it is always prudent to keep an eye on certain monsoon sensitive sector stocks.

Fertilisers:

A good monsoon is good news for fertiliser stocks. The rationale is demand for agricultural
inputs including fertilisers rises when the farmers are cash rich. Their income is directly
dependent on good crop output, which is a function of good rains.

FMCG

FMCG sales are primarily by consumption of rural India.

The purchasing power of rural India is directly linked to good agricultural income and
monsoon. Hence normal monsoon can improve the purchasing power of rural India, which
helps FMCG companies clock in higher sales figures.

Cement

Cement stocks have already started falling in the range of 1-2% on arrival of early
monsoon. A good monsoon has a negative impact on Cement stocks

Traditionally cement despatches decline in June-September period because of a slow down
in the construction activity during these months.

Auto

The FMCG-monsoon co-relation can be extended to auto sales as well. Poor monsoon means
a further dip in the lacklustre auto market.

Almost 50% of the two-wheeler demand comes from Rural India. Secondly, if the farm out
put falls because of deficient monsoon, the farmers will not invest on agriculture related
equipments such as Tractors. Auto sector has already seen a sluggish period with flat sales
reeling under the pressure of high fuel prices and interest rates

Beyond Stocks

Apart from a direct impact on certain stocks, a bad monsoon can play a spoilsport in several
other ways. If the farm output declines on the back of a poor monsoon, it triggers
inflationary pressures. This means higher input costs for companies and lower margins.
From your perspective, higher inflation means a higher cost of living. This also limits the
Reserve Bank of Indias (RBI) scope to lower interest rates, which will keep your EMIs
constant. Needless to say, if RBI maintains a status quo on interest rates, it will drag down
rate sensitive sector stocks such as banking, auto and real estate.

Gross Domestic Product
Everybody is talking about a declining GDP and its impact on the economy. In simple words,
GDP indicates the financial health of a country. So if a GDP is declining, it means the
financial health of the economy is deteriorating.

GDP as a figure, encompasses agriculture, industrial output and services.

The recent RBI policy stated that Indias GDP growth in the third quarter of 2012-13 was
4.5%, which was the weakest in the last 15 quarters. Moreover, the overall growth, has also
decelerated to its slowest pace in a decade.

How does it impact you?

GDP is a strong indicator of future jobs prospects and salary hikes. Whenever GDP
increases, the per capita income of the individual rises. Higher the GDP, better are the job
prospects and salary hikes.

For example, in 2005-09, for example, he per capita income rose by 32% to Rs 26,000 as
GDP was hovering at 8-9%.
With the dipping of GDP figures, it is time to safeguard your jobs, save money, curtail
expenses and build a contingency fund. Never know when any emergency comes knocking!



Inflation
Recent reports by economists say that the Reserve Bank of India (RBI) may not drastically
cut repo rates in May because of high inflation (CPI).

Inflation as a macro economic indicator gives you an indication of the actual value of your
money. Apart from giving an idea about your present expenses, inflation has a far-reaching
impact on your money.

In India we still follow WPI (wholesale price index) instead of CPI (consumer price index).
However, to analyse the impact of inflation on your money, you should look at primary
articles and fuel items as they have a direct impact on your disposable income.

You have to factor in inflation while making long-term plans to get an idea of the kind of
savings you will need for retirement. For example, if your current monthly expenses is Rs
30,000 then you have to spend over Rs 3 lakh per month just to maintain your current
lifestyle if the inflation grows at 10%. This simply means, a growing inflation erodes the
value of your money.

To start, you should compute the real rate of return to assess the impact of inflation. Less
riskier investments such as fixed deposits, PPF or NSC assure safe returns but are not
capable of beating the inflation. Real estate, gold, and equity are considered good hedges
against inflation over long term. Whenever you invest in an instrument, compute the future
value after accounting for an inflation of at least 8% to get accurate results.

Book Value per share:
Book value per share basically tells us the worth of each share. If you buy a share at Rs 100
and its book value is Rs 120, then the share is considered a value-buy.

In financial jargon, book value per share is the value of total assets divided by total number
of outstanding shares in the market
Financial Analysts usually compare the book value per share with its market price for
fundamental analysis of shares.

If the market price of the stock is lower than the book value, it implies that the share is
undervalued. However, if you plan to invest in one such stock then you should understand
why the market price of share is lesser than the book value. It could be external factors
such as economic slowdown, weak global cues, sectoral issues or an issue with the company
itself.



What is a P/E ratio?
The price to earnings (P/E) ratio is the most popular and commonly used indicator to value
a companys stock. P/E ratios are available for a company, an industry or even a stock
group such as the BSE Sensex or the NSE Nifty.

In financial jargon, it is defined as the ratio of a company's stock price to its earnings per
share (EPS-a companys net profit divided by number of shares issued by the company).

In simple terms, it helps you to evaluate how cheap or expensive is a particular companys
stock price.

For example, if a company stock is priced at Rs 300 and the EPS is company is Rs.15, the
P/E is 20. This implies an investor is ready to pay 20 times the companys earnings.

You can use the P/E Ratio to compare stock prices of two companies from the same industry
or even from different industries.
Fundamental Analysis Vs Technical Analysis of a Stock
These terms refer to two different stock-picking methodologies. They are used for research,
which helps you forecast the future growth and stock trends. Like any investment strategy,
both have their advantages and disadvantages.

Here are the defining principles of each of these methods of stock analysis:

Fundamental analysis is a method of evaluating securities by attempting to measure the
intrinsic value of a stock. Fundamental analysis studies everything from the overall economy
to industry conditions to the financial condition and management of companies.

Technical analysis is the evaluation of securities, which involves studying statistics
generated by market activity, such as past prices and volume. Technical analysts use stock
charts to identify patterns and trends that may suggest how a stock will move in the future.

Which strategy works best is always debated, and many volumes of textbooks have been
written on both of these methods. So, do some reading and decide for yourself which
strategy works best with your investment philosophy.

Target Price & Stop Loss
Target Price

Technical traders usually set a target price for a stock once they enter into a trade. This
enables them to know when they should book their profits. There are a number of methods
that technical traders use to arrive at a target.

One of the most common methods of setting a target price is achieved by first identifying a
technical chart pattern.

After the pattern is identified, price targets can be set by measuring the height of the
pattern and then by adding it to (or subtracting it from) the breakout price.

Stop Loss

A stop loss is an order to buy (or sell) a security once the price of the security climbed
above (or dropped below) a specified stop price.

When the specified stop price is reached, the stop order is entered as a market order (no
limit) or a limit order (fixed or pre-determined price).

Keeping stop losses enables traders to control their losses on losing trades.

Dividend Yield Stocks
The dividend yield of a share is the company's total annual dividend payments divided by its
market capitalization, or the dividend per share, divided by the price per share. It is often
expressed as a percentage.

Historically, a higher dividend yield has been considered to be desirable among many
investors. Some investors may find a higher dividend yield attractive because they are
attracted by the annual dividends received into their account.


Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to
the market as a whole. A beta of 1 indicates that the security's price will move with the
market.

A beta of less than 1 means that the security will be less volatile than the market. A beta of
greater than 1 indicates that the security's price will be more volatile than the market. For
example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech stocks have a
beta of greater than 1, offering the possibility of a higher rate of return, but also posing
more risk.

Common terms used in Financial Results
With most companies announcing their financial results, we have de-jargoned some
commonly used financial parameters to help you understand those numbers better.

Net Profit

As the name suggests, net profit measures the actual profit a company makes after
accounting for all costs. It is also commonly known as net earnings or bottom-line of a
company. Growth in net profit is expressed in percentage terms. In India, a company
announces its net profit every quarterly, half-yearly, 9-month period and on an annual
basis.

Net interest Margin

This gives a comparison of the companys return on investments to its debt situation. Higher
the net interest margin, better it is for the company. This simply shows a company is able
to keep its interest expenses under check.

Operating Profit

It refers to the profit generated by companys core business operations. This does not
include other income, interest earnings and taxes. This is also called EBIT (earnings before
interest and taxes) or operating income in financial lingo.

Net Sales

The amount of sales generated by a company after all deductions, which include returns,
allowances, or any discounts. Every company reports this number is its financial results.
This figure indicates how much revenue a company has clocked in by selling its product and
services.

EBITDA

It is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
is essentially net income with interest, taxes, depreciation, and amortization added back to
it.

It can be used to analyse and compare profitability between companies and industries
because it eliminates the effects of financing and accounting decisions.

Support & Resistance
Support and resistance is a concept in technical analysis that the movement of the price of
a security will tend to stop and reverse at certain predetermined price levels.

A support level is a price level where the price tends to find support as it is going down. This
means the price is more likely to "bounce" off this level rather than break through it.
However, once the price has passed this level, by an amount exceeding some noise, it is
likely to continue dropping until it finds another support level.

A resistance level is the opposite of a support level. It is where the price tends to find
resistance as it is going up. This means the price is more likely to "bounce" off this level
rather than break through it. However, once the price has passed this level, by an amount
exceeding some noise, it is likely that it will continue rising until it finds another resistance
level.

Lower Top & Bottom-Technical Analysis
Lower Top

Lower top is a concept used in technical analysis to reflect a downtrend in a stock or index.
On the charts, lower tops are characterised by each important high being lower than its
previous important high.

On observing this on the charts, traders can try to build shorts on every pullback rally or at
least avoid building fresh longs.

Lower Bottom

Lower bottom is a concept used in technical analysis to reflect a downtrend in a stock or
index. On the charts, lower bottoms are characterised by each important low being lower
than its previous important low.

On observing this on the charts, traders can try to build longs near the lows or avoid
building fresh shorts near the lows.