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Ratio Analysis for Investments

In: Business and Management

Submitted By kumarvels
Words 2425
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Here are the checks you run before you put your money into a cash-rich company
The balance held by a company in its bank account can give the impression of a sound edifice but it could turn out to be a pile of rubble if you take a closer look. Here are a few parameters you can run through before buying that cash-rich company’s shares you have been yearning for.
Operating cash flows
The companies that have large cash surpluses are mainly those that have been generating cash from operations consistently over the years.
But there are some that do not conform to this trend and are best avoided. For instance, Indian Oil Corp, despite generating the second highest cash flow from operations in FY2014, IOC generated negative cash flow in many years over the past decade. Similarly, companies such as Gammon India and DLF display the propensity to declare negative cash flows.
This shows that even if these companies have large cash balances towards the end of some years, their operations are not profitable enough to enable them to accumulate large cash reserves over the long term.
Looking at the proportion of revenue that is held back by the company after accounting for operational expenses (operating cash flow/revenue) is another measure that can help us gauge the extent of profitability of the company. Companies such as Bharti Airtel, NTPC, Infosys, Coal India, ITC and Idea Cellular are more profitable on this parameter with cash generated from operations of around 20 per cent of sales.
On the other hand, companies from the Tata group appear far less efficient if we apply this metric. Despite generating large revenues, cash generated from operations for companies such as Tata Steel, Tata Motors and Tata Power is less than 10 per cent.
Addition to gross block

Some companies could be foregoing investments in their own businesses resulting in large cash surpluses. You…...

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