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.
