MUST READ!! BEFORE YOU INVEST IN THE SHARES / STOCKS OF LOSS MAKING COMPANIES – DR SHASHANK M HIREMATH

Dear Investors, 

            While we invest or think of investing our money in the stock market for any duration, certain key aspects are to be considered. In this article, I have tried to explain the circumstances wherein many investors, including day traders make mistakes in their stock selection and keep shouting slogans on the entire stock market for making losses. After reading this article, you might find a reason, as to why I would like to invest or say no to the loss making companies for investments. Just like a doctor, an investor should identify the pulse and symptoms of a loss making company and stay away from investing in such companies.

Now, let us examine the important factors: 

Why do investors or traders incur losses in stock market?

•  According to the research more than 95% of the Indian traders loose their capital in the stock market.
  
•  In the stock market, more than the news, the reaction and sentiments of the investors play an important role.
  
•  Most of the times, the company would have reported profits in its quarterly or yearly results, yet the stock price falls.
  
•  Similarly, the company would have reported losses in its quarterly or yearly results, yet the stock price rises. It is not strange, although it looks like.
•  Stocks usually follow the cyclical trends. 

Symptom-1 of a Loss Making Company

•  Companies that make losses Year on Year (YoY), Quarter on Quarter (QoQ) usually tend to burn their cash very fast.
•  Example: Net profits of Vodafone Idea Ltd have been declining YoY since 2015. 

Effect on the Stock Price Since past 5 years

•  NIFTY 50 Vs Vodafone Idea Ltd 

Symptom-2 of a Loss Making Company

•  Companies keep loosing money if they are unable to pay the interest on debt, despite increase in the revenues.
  
•  Example: Interglobe Aviation Ltd (Indigo) has Debt-Equity ratio of 13.91
•  Such stocks are highly volatile and not good for investing

Effect on the Stock Price Since past 5 years

•  NIFTY 50 Vs Interglobe Aviation Ltd

Symptom-3 of a Loss Making Company

•  Any inconsistency in the gross sales (also known as top line), cash flows etc shows poor growth of the business.
  
•  Example: Coal India Ltd shows declining cash flows
•  Investors should not just look at the attractive dividend yields of such companies. 

Effect on the Stock Price Since past 5 years

• NIFTY 50 Vs Coal India Ltd 

Symptom-4 of a Loss Making Company

•  Decreasing profits before taxes and net profits.
•  It shows how efficiently the company management is running the business.
•  Ex: Yes Bank Ltd shows losses in the year 2020 

Effect on the Stock Price Since past 5 years

• NIFTY 50 Vs Yes Bank Ltd 

 Symptom-5 of a Loss Making Company

•  Investors should look for a positive / negative trend in the bottom line.
•  Ex: ITC Ltd share prices started falling since July 2017 from it’s lifetime high of Rs. 335 till date, because GST council levied 28 per cent tax plus compensation cess on cigarettes.
•  Due to such events the companies cash flows get affected. 

Effect on the Stock Price Since past 5 years

•  NIFTY 50 Vs ITC Ltd

Symptom-6 of a Loss making Company

•  Earning Per Share shows a decreasing trend.
•  EPS = Net Profits / Outstanding Shares in the Market
•  Ex: Shipping Corporation of India Ltd shows decreasing EPS 

Effect on the Stock Price Since past 5 years

•  NIFTY 50 Vs Shipping Corporation of India Ltd 

Symptom-7 of a Loss Making Company

• Poor quality of leadership and management in companies like Punjab National Bank are not good for investors.
• Several problems like increasing NPA’s, Scams etc will affect the future prospects of businesses.
• Ex: Punjab National Bank Ltd never went up after October 2010 

Effect on the Stock Price Since past 5 years

•  NIFTY 50 Vs PNB Ltd 

Other Symptoms of Loss Making Companies

•  Reduction in the dividend payouts.
• Changes made in the key positions at senior level.
• Possible financial scam in the company.
• Increased pledging of shares by promoters.
• Insider trading like dumping of shares before bankruptcy, especially in small-cap companies.
• Legal concerns raised by stakeholders of the companies like employees, government, public, customers etc.
• Failure of merger, demerger and acquisition activity.
• Changes in the consumer tastes and preferences.

Apart from the above mentioned there would be many more factors affecting the stock prices and performance of the listed companies. I will be happy to read your valuable comments about this article. 

Happy Investing!! 🙏😎

Dr. Shashank M Hiremath,

Associate Professor, Sindhi Institute of Management,

Kempapura, Hebbal, Bengaluru-24

Ph: 9845239036, Email: shashankmh2000@gmail.com

YouTube Channel: https://www.youtube.com/channel/UC7Ydp53iTxiGnO-1rSAz-qA

DISCLAIMER:

Investment or Trading in Securities Market is subject to market risk, past performance is not a guarantee of future performance. None of the content published on my YouTube Channel, Blogger site etc constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.