Working capital is a financial metric which represents Operating liquidity available to a business and is a critical component in the functioning of any business. It is a measure of the company's efficiency in managing its operational costs. Working Capital Analysis is a crucial before taking an Investment decision in any Company.
What can be interpreted from Working Capital Cycle?
Every Industry has its own dynamics in terms of its Working Capital requirements. Working Capital comparison between Peer companies will help to deduce the efficiency of the Business and also understand the Capital Allocation capability of its Management.
Every Industry has its own dynamics in terms of its Working Capital requirements. Working Capital comparison between Peer companies will help to deduce the efficiency of the Business and also understand the Capital Allocation capability of its Management.
1) Most of the Fast growing companies continue to stretch their Working Capital which poses huge Balance Sheet risk. This kind of WC fueled growth is not sustainable.
- Problems of Companies like Subiksha, Jain Irrigation etc come from elongated Working Capital cycle and increasing Inventory days (or) Increased Creditor days. Both increase the leverage of the Business.
2) Quality of Growth can be understood from analysis of the Company's Working Capital Cycle.
- Most companies try to push growth by giving higher Credit (or) Varying Creditor days. All these happen during the boom periods and don't continue for long.
Positives Of Negative Working Capital Cycle
A Negative Working Capital cycle basically means that the company is having higher Current Liabilities when compared with its Current Assets. Negative Working Capital essentially means that the company is able to pre-sell its products and gets a decent Credit from its Suppliers which help it to grow its Business without any Capital requirements.
A Negative Working Capital cycle basically means that the company is having higher Current Liabilities when compared with its Current Assets. Negative Working Capital essentially means that the company is able to pre-sell its products and gets a decent Credit from its Suppliers which help it to grow its Business without any Capital requirements.
A Negative Working Capital cycle where the company is able to pre-sell its products (or) get advances from its customers is a huge positive for the Company's shareholders. This indicates the Huge Customer demand for its products or a very Strong Brand. Only a few companies have this favorable situation and all these Shares have been Huge Multibagger in the past. (Eg: Colgate, VST Industries, HUL etc)
Interpretation of M***F***'s Balance Sheet
Our new Multibagger pick is one of the rare companies which exhibit strong Working Capital Management with a negative Working Capital Cycle. Let us have a closer look into the Balance sheet details of this stock.
Our new Multibagger pick is one of the rare companies which exhibit strong Working Capital Management with a negative Working Capital Cycle. Let us have a closer look into the Balance sheet details of this stock.
It can be easily seen from the above picture that the Company gets a Significant amount as "Advance from Customers" which shows the Demand pull for its products. Only if the product flies off the shelf will the company able to Pre-sell it to Distributors. This clearly shows the Brand Pull of its product.
Even without knowing the Business, it's easy to understand the financial characteristics through Proper Analysis of Balance Sheet, P&L Statement and Cash Flow accounts. This Business has low CAPEX debt, High Asset Turnover, Healthy Margins and Negative Working Capital cycle - All of which indicates the Quality of the Business and Huge Share Holder Returns.
Our Multibagger Stock Pick: Interesting Viewpoints
· Company had two Business divisions. One was a legacy Business which was a drag on its other Great Business. The legacy business was hived off a few years back.
· This Family Business now has a new Wharton educated younger generation Scion who is driving change in the Business with a Strong focus on building the business to the next level.
· Company has a Strong brand and a Niche Focus in a Huge Business segment.
· A Consumer product whose Price point is a low and affordable 5 Rs/-.
· Business which has grown its Revenues over 3X and Profits over 12X in the past 5 Years which clearly shows the nil impact of the general economic slowdown.
· A smaller company in the similar sector had a Private Equity deal which valued the company at several times the current Valuations of M***F***.
· Company has a ROE of around 40% and Return on Capital of > 32%. It also has an Asset turnover of over 3X its investments.
As per our discussion with the Company's Senior Management and our Primary Research, we expect the company to clock a very high 35% CAGR in revenues in the coming 2 years. Management is also confident of maintaining its margins which will lead to huge profitability without any Equity dilution. This revenue growth is basically coming from the Huge Capacity expansion which the company has completed in the last Quarter.
All of this along with other Research information makes us confident in the Future of this Businesswhich is not tracked by any of the Big boys in the Market, but has the potential for Institutional Investment over the next few years. This Stock perfectly suits the tagline of our Multibagger Package. "Invest in Small Cap companies which will become Large Cap".
All of this along with other Research information makes us confident in the Future of this Businesswhich is not tracked by any of the Big boys in the Market, but has the potential for Institutional Investment over the next few years. This Stock perfectly suits the tagline of our Multibagger Package. "Invest in Small Cap companies which will become Large Cap".
Courtesy : hbjcapital.com
