With rising awareness of Diwali without crackers, people are taking the initiative to celebrate Diwali in an eco-friendly way. During Diwali, bursting crackers is still in trend. An ordinary bomb still has a one-time effect. But one must have gotten tired of the ladi bomb because every time you anticipate it getting over, it keeps going.
This is very similar to what happens when you pick stocks without conducting proper research and investing based on some acquaintance’s recommendations. You will end up with a portfolio that never fails to send shocks and chills down your spine, and when you expect it to stabilize after a while, it doesn’t.
So, this Diwali, let’s have a motto of creating a cracker-free portfolio.
3 Ways to Pick Quality Stocks
1. Quality of Promoters
The company you wish to invest in must have steady cash flows, make good profits, and have a competitive edge. You must check the annual reports not just to look at the financials but also to analyze the quality of promoters.
Check the background of all the promoters. If you find anything suspicious about a promoter being irrational about using investors’ money, it is a red flag.
The remuneration of the management and board members should be in sync with the company’s profits. If the company is in losses and the management’s remuneration increases inappropriately, it is seen as corrupt malpractice in the broader market.
Check the long-term view of the management about the company’s future from the Director’s Report or Management Discussion & Analysis section. It will help you understand their perspective on the future of the company.
Also, check the auditor’s disclaimer section, which mentions issues like lack of evidence or concerns about the business transactions in the ledger accounts.
2. Metrics You Must Check
- Sales Growth : A consistent and steady top-line growth indicates that the strategies and policies the company has been implementing to increase sales are working for them. On average, you must check the sales growth of 3-5 years.
- Operating Profit Margin : When a company’s sales are high, but the expenses are the same, the margin will improve. We need to find and compare companies with higher operating margins.
- Profit After Tax : Again, this is a crucial metric you must check because if the company is profitable, then only you will make money as an investor. So, check for consistency and steady growth over 3-5 years.
- Debt to Equity Ratio : High debt on your balance sheet is not attractive. Pick independent companies. This means that the company generates profits and invests in the growth business.
- Return on Equity : ROE tells you how much money you get back on your investments. Rising ROE is beneficial for investors.
3. Strong Economic Moat
Players in business have traditionally dominated Indian markets since license raj times. Hence, these companies have championed themselves in those categories and are generally seen as safe investment returns.
However, liberalization has helped nurture new players with newer abilities and technologies. Therefore, you must explore companies having a unique approach which could emerge as a market leader in the future in its sector. Remember, there are several market opportunities that could be future pathfinders.
Investing in fundamentally strong companies will ensure your investment gives you better returns while providing opportunities to learn and grow for the rest of your life.
So, this Diwali, say yes to a cracker-free portfolio!
* Teji Mandi originally wrote and published this article for Financial express.
