How To Avoid A Bad Company To Invest In

Many brokerage houses come up with many researches on the stocks listed on the NSE or BSE that may give good returns in the long run but can you always rely on them ? I totally respect the researches done by the analyst of the brokerage houses as they have more resources and people with them and we should always respect the effort applied by them,but seriously you guys don’t even trust a new barber for cutting your hair, you always go for the same one then how can you invest your hard earned money because someone told you do so right!!. What I believe is we should read these researches but also do a research from our end to. I will tell you a fundamental parameter that you can look into a company to avoid investing into a fraud or false company.

Operating Cash Flow / Net Profit

When you start analyzing a company the first and foremost fundamental parameter you should always look for is the net profit written on their profit & loss statement and then compare it with operating cash flow. Now what is a operating cash flow?

Operating Cash Flow:-The amount of incoming cash into the company

Now why we should do so ? Why Is it Required ? Lets take a example to understand it.

Suppose a car showroom owner sells a car at Rs 500 to you. Now you as a customer writes a “cheque” to the car showroom owner and tell him to get it cash after 1 month [when your account is credited with your salary] . So what the car showroom owner does is he writes a profit of Rs 500 into his profit & loss statement but did he got the money ? No right !! He will get this profit after 1 month when he converts the cheque into cash but what if the cheque was bounced! or maybe you have done some fraud with company by just paying the down payment of Rs 50 and took a car of worth around Rs 500. This same scenario happens with company also! they will sell the product on credit but sometimes they wont get the cash on the product sold!

So what we understood by this example? We don’t want a company whose profits are only in books rather than actual cash,I mean what is the point in running a business where we don’t get the cash on the product sold! I will show how you can check this by a example.

TATA CHEMICAL profit & loss statement
Lets take a look at TATA CHEMICAL profit & loss statement

If you add the Net Profit(5 years) of Tata Chemical it will be around Rs 4,674 crore. Now lets check the operating cash flow of the company which tells us does Tata chemical is receiving this much of amount cash ?

 operating cash flow of Tata chemical
Lets take a look on operating cash flow of Tata chemical

If you add these numbers this will be around Rs 5,529.44 crore which is more than the profit shown in the books which tells us that Tata Chemical is somewhat safe to invest in it but that doesn’t mean you should blindly invest in it.This is just a parameter to check whether we should start analyzing the company on fundamental grounds for investment.

Now lets take look on a bad company!

If you add the numbers the net profit of the company is around Rs 54.22 crore.

Lets take a look on operating cash flow of LOVABLE LINGERIE
Lets take a look on operating cash flow of LOVABLE LINGERIE

If you add the numbers, operating cash flow of the company is around Rs 21.25 crores.Is it good? No of course not !! Company is showing it is making a whopping profit of Rs 54.25 crores over the 5 year span of time but it is receiving only Rs 21.25 crores cash against it which is totally wrong!!! I hope you got my point

So this fundamental analysis on the company will actually save your time also because you won;t consider it further to analyze it.

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