Application of checklist
Stage 1 of the equity research process helps us gain an overview of the company by addressing questions about how, what, who, and why. It gives us a complete picture of the business. However, in the end, we must evaluate whether or not it is worth investing in; after all, attractive numbers are just as significant as a good outlook.
The aim of the second stage of equity research is to gain an understanding of the data and assess whether the firm’s activities and financial results are compatible. If not, it will fail to meet the criteria for an investible grade.
We now shall analyse the figures of Amara Raja Batteries by assessing each item on the checklist. Let us take a look at their P&L items – Gross Profit, Net Profit, and Earnings Per Share.
What is Revenue & Pat Growth
The initial sign of a business that could be suitable for investment is its expansion rate. To assess the expansion of the firm, we have to analyse both revenue and profit after-tax amounts. We shall assess progress from two points of view –
I like to invest in firms that have increased revenue and profit. This growth should be at least 15% on a compound annual growth rate.
The 5-year CAGR revenue and PAT (profit after tax) growth stood at 18.6% and 17.01%, respectively – a healthier pair of figures. However, we must examine the other metrics before concluding.
What are Earnings per Share (EPS)
Earning per share reflects the profitability of each stock. The rate of growth between EPS and PAT suggests that there is no extensive issuance of new shares beneficial to current shareholders. This is a mark of the management’s efficiency.
The 5-year earnings per share compounded annual growth rate for the financial year 14 is 1.90%.
How is Gross Profit margins calculated?
Gross profit margins are expressed as a % and here’s how it is calculated:
Gross Profits / Net Sales
And how do we calculate Gross Profits?
It is Net Sales- Cost of Goods Sold
The cost of goods sold is the cost incurred in the production of the finished good. Previously, we went over calculating the inventory turnover ratio. Now, let us move on to evaluate how ARBL’s Gross Profit margins have changed over the years.
ARBL has exceeded the required GPM or Gross Profit Margin of 20%. This implies a few things; it suggests that their financial performance is sound, as well as their overall business strategy.