What are the details to look for in annual reports of Tata Elxsi, Wimplast and Eclerx

#1
Tata Elxsi, Wimplast and Eclerx were the best performers in my current selected stocks for the year 2015-2016.

I briefly read the director's reports in the 2014-2015 annual reports for the above three companies but I could not feel or tell that the companies were going to perform very well from 2015-2016 (Wimplast's director's report seemed shaky but the company still did well!).

I know that I should dissect the accounting information in the balance sheets in the annual reports but is there a way to use annual reports to forecast long term growth for the company or am I looking for the wrong thing in annual reports?

I currently use ratios to tell me whether a company has been doing well. I want to know how to read an annual report so that I can tell whether a company is going to keep doing well!!!
 
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vagar11

Well-Known Member
#2
Re: What are the details to look for in annual reports of Tata Elxsi, Wimplast and Ec

I am not a good fundamentalist myself. Few things that you should atleast check.

Consistent growth in their annual profits. Due to this p/e will be high.

Compare p/e of this to the sector p/e and other companies which are showing same growth in the same sector. For small companies,p/e probably will be less as compared to large companies.

low Debt.

Promotors stake.

Look for the company's decision.

Just select 10 and hold on to them. Don't sell as some of them are going to be winners.
 
#3
Re: What are the details to look for in annual reports of Tata Elxsi, Wimplast and Ec

Thank you for the input Vagar11.

I already use financial websites to look at p/e, eps, debt, Promoters stake etc...

Getting information from the Director's report that affects the share price seems to be difficult for me. I can only tell when they are optimistic about the future, are confident about the next few years or imply that the next few years might be shaky. The problem is that I can't measure their confidence level that accurately and I'm not sure if their confidence is founded or unfounded because in the case of Wimplast, the director didn't seem optimistic but the share price did well.
 

vicky_ag

Well-Known Member
#4
Re: What are the details to look for in annual reports of Tata Elxsi, Wimplast and Ec

I normally don't post on TJ as people tend to think I am too condescending so take, what I am going to say, as you may.

Correct me if I am wrong but from the first post I understood that you have built a portfolio based on ratios and your formulas. Now in that portfolio for the year FY15-FY16 these particular companies had the highest growth. You want to now understand if there is a way to predict these stocks and looking at 2014-2015 annual reports didn't help.

If yes, here's a question - Are you using the current ratios to build the portfolio? If yes, go back and check if the same ratios were applicable when you had the data back in 2015 because currently you might be doing a forward bias where you are using the current profitability to see if there was a way to predict this profitability when 2014-2015 report was released. The short answer here is - you cannot predict this.

This is also called Survivorship bias. You can read about the context here:
https://en.wikipedia.org/wiki/Survivorship_bias#In_finance_and_economics

It is one of the traps for a trader, and very much for people trading technicals. Frankly it is not helped by papers claiming "If you invested 1 lakh in Infy back in 1998..you would have made xxxx in 2016". The problem is unless one had a time machine or enough conviction in Infosys you would have invested in 1998 but its not possible to predict today's profitability.

Then the obvious question is, does it mean there is never a way to predict the profitability? Answer is there is a way but its not a sure shot 100% and goes way beyond ratios. For that you need to learn about the company, its core market and what really drives its profitability. To give you very small example, a retailer, online or offline. What really drives the business? Obvious answer is "total sales". But is it? There are things like "receivables turnover" - which measure how fast are they receiving money from their customers and "payables turnover" - which measures how fast they are paying out their outstanding money.

Now a retailer company could start a super sweet EMI program in which people can buy stuff now and start payment after 3 months. This could attract many customers, I mean who doesn't like to able to buy stuff now and pay later. You will find the profitability has increased and the P/E etc will look attractive too. But is it a buy? The answer - its not so simple. You have to look at the rate they are "paying" their dealers. Because if that turnover rate has not changed then they are basically borrowing money from the dealers and giving it to the customers. They would at some point run out of money because the rate of incoming is slower than rate of outgoing. So is it a bad buy? Maybe....there could be a chance of getting a favourable investment or a loan from a bank to keep them going. So will it be a good buy then? Maybe..because at that time you will need to assess whether the customers they are gaining are going to be returning/loyal customer or is it just a one time thing.

Each of these "maybe" would need a proper investigation before one can really say its a good buy. Even then there are chances of things going wrong. A long winded work for nothing gained, one might say but then it really increases your returns if you could pull off something like this.
 
#5
Re: What are the details to look for in annual reports of Tata Elxsi, Wimplast and Ec

In the annual report you are primarily looking for

- Margins
- Cash flows
- Changes in the risks of the business
- Certain Industry specific ratios

Absolute profit numbers will be useless for trading purposes without knowledge of analyst expectations.
 

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