Get the measure of your company:Sagar Patel

Five financial ratios and four valuation tools that help you decide whether a company is worth a look-see.

WHEN YOU invest in a company’s stock, you effectively buy a piece of its business. Therefore, the returns on your investment are primarily a function of how the business does. Since there’s a risk attached to a business, your investment in it should earn more than the risk-free rate of return (what your money would have surely earned otherwise).

But how do you tell whether the company’s business will deliver such returns? How do you tell whether the company’s operations are sound? And at what price should you buy the stock to get those returns? Although there are no definitive answers, there are some financial ratios that help you get closer to the answers. The level and historical trends of these ratios can be used to draw inferences about a company’s financial condition, its operations and attractiveness as an investment. By no means is this enough, for there are various qualitative factors that also need to be looked at. Says Ajay Bodke, fund manager, SBI Mutual Fund: "Ratios are just the starting point."

Financial ratios facilitate comparison, across companies in a sector and for a company over a period of time. For instance, a net profit margin for a company of 25 per cent is meaningless by itself. But if we know that this company’s competitors have net margins of 10 per cent, it can be inferred that it is more profitable than its peers. Further, if the net margin has been steadily increasing over the years, it’s a sign that the company’s management is implementing effective business policies and strategies.

Two kinds of data are needed to calculate these ratios: financial figures and share prices. Both are easily available. Financial figures can be culled from annual reports or websites (company and financial), and stock prices from newspapers. Investment analysts tend to downplay financial ratios while evaluating a majority of Indian companies due to credibility issues related to numbers. Says Anand Radhakrishnan, fund manager, Sundaram Mutual Fund: "I would give a weightage of 60 per cent to ratios in the Indian context. This is lower than international standards, as Indian numbers are less reliable."

Even so, financial ratios are a good starting point to wade through the voluminous world of stocks. The ratios vary depending on the kind of business being analysed. For example, some of the ratios used to analyse manufacturing companies don’t apply to service companies or banks. Here, we focus on key financial ratios used to analyse manufacturing companies, which have the largest representation on the bourses. Further, to facilitate a first-level understanding of these tools, we have deliberately avoided exploring their finer ramifications.

Investment Rules of Warren Buffett

Friday, 22 September 2006
Today, we summarized some important of Buffett’s investment rules for readers. Warren Buffett, the worlds greatest ever investor, number two richest man on earth and second to Bill Gate. We study how he uses the commonsense investment and evaluation rules on his stock selection.
Below are some of the rules that he follows:

Warren Buffett has two main rules. The first is "never lose money." The second is "Don't forget Rule Number one."

Commonsense Investment Rules
· Written or mental note of your investment plan with discipline to follow it.
· Be flexible enough to change or evolve your investment strategies when sound judgment and conditions deter.
· Study how sales and earnings of a company derived.
· Focus on your purchase candidate. Understand the firm’s products or services, the company’s position in its industry and their competitors.
· Learn as much as possible about the people managing the business.
· No predictions for the stock market or the economy but base on stock value.
· Sit on the sidelines in a cash position if you can’t find investment opportunity based on your criteria.
· Avoid buying at very high prices relative to value, welling to wait for undervalued stock.
· Define what you don’t know, as well as what you do know and stick to what you know.
Evaluation Rules
· Is the business understandable?
· Are the CEO and top executives focused and capable based on the firm’s previous track record of sales and earnings and how the business run?
· Does management report candidly to shareholders?
· Does the company have top quality, brand name products used repeatedly and high customer loyalty?
· Does the company have a wide competitive edge and barriers to potential competition?
· Is the business generating good owner earnings; free cash flows?
· Does the business have a long-term history of increasing sales and earnings at a favorable growth rate?
· Has the company achieved at least 15% or better return on shareholders equity (ROE)?
· Has the company maintained a favorable profit margin compared with competitors?
· Goals of the business and the plans to achieve them?
· What are the risks of the business?
· Good financial strength with low or manageable debt requirements?
· Is the stock selling at a reasonable price relative to future earnings and price potential?
There are many more to be listed here but I believe these are few important rules that can’t be ignored.

Roe new

1. "The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share."
Sometimes ROE is referred to as "stockholder's return on investment." It tells the rate at which shareholders are earning income on their shares.
Always look at the return on equity (ROE) to see whether or not a company has consistently performed well in comparison to other companies within the same industry.
ROE is calculated as follows:
= Net Income / Shareholder's Equity
Just having a high ROE last year isn't enough. The investor should view the ROE from the past five to ten years to get a good idea of the historical growth.
2. seek not capital gain but ownership in quality companies that are highly capable of generating earnings.


Avoid
· Businesses that bet the farm
· Businesses dependent on research.
· Debt-burdened companies.
· Companies with questionable management
· Companies that require continued capital investment

My mom's a super-brand By Harish Bijoor

A super-brand is one which has been around for years and is a favourite in each and every household. That status is not determined by its rating by any organisation or poll.

WHAT is a super-brand?
The word is being bandied around in our commercial lives by every Tom, Dick and Harish! Everyone out there in the great marketplace for brands seems to have his or her own version of a definition to offer. It is time to sit up and take stock.
A super-brand is a brand that has made it big. A brand that has been around for a long number of years and has survived the upheavals of a tumultuous marketplace. A brand that has very large volumes that makes it to the top-of-the-pops chart in every consumer home. A brand that is very profitable. One that rakes in the moolah without much of advertising and marketing spends even. A brand that has arrived. A brand that is a consumer favourite. A brand that causes goose bumps in you when you hear the name uttered. A brand that is a rage. A brand that has cult following. A brand that is a product no more.
All of this and much more for sure. At the same time, none of these on its own as a point of precise definition!
The super-brand is a complicated entity. More complicated than the concept of a simple brand. The super-brand in reality is a passion. A brand that has scaled the highest peak in the passion-scale of brands and their respective consumers.
Let us also establish what a super-brand is not. Let us categorically say that a super-brand is not what is proclaimed in a broad-spectrum list of 100 brand names in a country, across categories. It is not what an organisation rates. It is most certainly not what is awarded the super-brand logo by a poll of executive opinion!
A super-brand is then a very different entity. An entity that deserves some attention. Some respect.
Let me start at the level of the commodity. A commodity is that much less of a brand than a quasi-brand is. The quasi-brand is a more recognisable form of the commodity but a wee peg lower in the hierarchy of the brand. And the brand is a thought. A thought that resides in a consumer's mind.
The super-brand is right at the top of the pecking order of brands. The super-brand status is indeed that status which a brand enjoys as its sets of consumers self-actualise in the joy of the brand. To understand this statement, one needs to visualise Maslowe's hierarchy of needs.
Right at the bottom of the pyramid is the broadest segment of them all. This is the segment that lies in the food, clothing and shelter domain of utility. Largely utilitarian in nature. This is indeed the mass of space where the commodity sits.
Just above this segment, a little higher in the pyramid sits the quasi-brand. This is a smaller segment. Consumers sit at higher-end needs in this category. The consumer has had his basic needs met. It is time to now look for the finer things in day-to-day life. Time to look for that bit of differentiation that sets apart the commodity from the quasi-brand.
And just above this segment of brand-wannabes is the brand itself. This is an arena of distinct thought. This is higher up in the hierarchy. The brand is a distinction. A distinction that sets apart standards of craving and want. The brand is a craving. A desire even.
Climb higher then. Right at the peak sits the super-brand. If the brand is a craving and a desire, the super-brand is a madness! It is a passion of passions!
The super-brand is that status which a brand acquires when the product offering is irrelevant even! Harley Davidson is not a motorcycle at all! It is a cult-statement! Nescafe is not a coffee at all! It is a lifestyle!
Imagine and assess the passion that a super-brand can command in its set of most loyal consumers, and you have the answer whether what you behold is a super-brand in reality or a fake bestowed with a label for commercial purpose.
What would you do to get the last available Harley Davidson in the world? Would you lie for it? Would you rob for it? Would you kill others for it?
Quantify and evaluate the passion that a brand evokes in its sets of consumers, and you might have the tinge of an answer that tells you what a super brand really is. It is indeed quite possible to build what I would call a Brand Passion Scale, which tells you where the brand in question sits on its evolution scale, from commodity to super-brand status.
The super-brand has normally a cult following that will not sway too easily from the format of the brand on offer. Many a time, the entire brand offering is controlled by sets of these cults. The Harley Davidson is a movement. A movement that is spurred by specific free-form Harley owner groups (Hogs). They will meet. They will debate. They will spread the Harley movement around, much as a cult would spread its tentacles all across potential sets of consumers.
The question again then is, what is a super-brand?
In many ways the answer is a difficult one. A super-brand in many ways is a specific offering that has distanced itself from its product utility to emerge as a passion and a craving. A brand that has for itself a cult following that will even kill for the brand if the need arises. The brand in question is in many ways a part of the life of the consumer. Any hurt or slur on the brand is taken as an insult to the consumer in question herself!
As I close this piece on the quintessential question, there is a point to note. A point I make with passion. Just as a brand is a thought that is owned in the consumer's mind, so is the super-brand a property in the mind of a consumer. Every consumer is likely to have a different super-brand of his or her own. In the case of comely Sumati Raman of Mylapore, superstar Rajnikanth is a super-brand. Her neighbour believes Mr Honest Raj (a popular Tamil film character) is a super-brand. And her neighbour believes Cuticura talcum powder is! And her neighbour will kill for a copy of The Hindu! One day without her favourite super brand is enough to set off withdrawal symptoms!
In short, to each their own. Each of us has our very own super-brand. There are just too many of these around. At the other end of the specific domain of the super-brand that is recognised by one and all, there are too few. There might just be eight super-brands in the world that are real and are able to stick to the tight definition of the super-brand I believe we must weave!
Therefore, let's respect the super-brand for what it is. It is an exclusive club. Not too many members in this league. Let us not clutter it with the confusion of our lack of understanding. There are only eight super-brands in the world at one end of the spectrum. And at the other, your mom and mine are all super-brands for each of us!
(The author is a brand-domain specialist and CEO, Harish Bijoor Consults Inc.)