Author: shyam

Usually, analysts fixate on the “net income” part of the income statement. However, operating cash flow is the lifeblood of a company and is a better metric of a company’s financial health for two main reasons. First, cash flow is harder to manipulate and second, a company that does not generate cash over the long term is on its deathbed.

One of the measures of balance sheet bloat is scaled total accruals (STA). STA = (net income minus cashflow from operations) divided by total assets. By ranking STA smallest first, and filtering only for situations where both net income and cashflow are positive, you end up with a list of profitable companies ordered by balance-sheet efficiency.

We aggregated income statements from the past 5 years and ranked companies based on STA. The 10 best:

BHARTIARTL [stockquote]BHARTIARTL[/stockquote]
EROSMEDIA [stockquote]EROSMEDIA[/stockquote]
USHAMART [stockquote]USHAMART[/stockquote]
ABAN [stockquote]ABAN[/stockquote]
INFRATEL [stockquote]INFRATEL[/stockquote]
WHEELS [stockquote]WHEELS[/stockquote]
ALKYLAMINE [stockquote]ALKYLAMINE[/stockquote]
SUVEN [stockquote]SUVEN[/stockquote]
SUBROS [stockquote]SUBROS[/stockquote]

and the 10 worst:

VINATIORGA [stockquote]VINATIORGA[/stockquote]
ICRA [stockquote]ICRA[/stockquote]
NAVNETPUBL [stockquote]NAVNETPUBL[/stockquote]
AIAENG [stockquote]AIAENG[/stockquote]
ECLERX [stockquote]ECLERX[/stockquote]
HERCULES [stockquote]HERCULES[/stockquote]
IMPAL [stockquote]IMPAL[/stockquote]
MOIL [stockquote]MOIL[/stockquote]
WABCOINDIA [stockquote]WABCOINDIA[/stockquote]
BLISSGVS [stockquote]BLISSGVS[/stockquote]

Note: we ignored stocks that don’t had 5 years worth of statements.

The problem with a stand-alone STA measure that it doesn’t track changes in balance-sheet health. More on that later…

Book Value to Market Value (BtM) is the ratio of the firm’s Book Value to the Market Price of Equity. Book Value is simply total assets minus intangibles and good will and Market Price is the total common shares outstanding times the market price of the stock.

The problem with the BtM ratio is that it tends to pick stocks that are under attack. However, its an useful measure to make an apple-to-apple comparison between stocks within the same sector.

When we ranked the universe of stocks using BtM, it obviously threw up a lot of stocks that have been hammered down:

SELMCL [stockquote]SELMCL[/stockquote]
MICROTECH [stockquote]MICROTECH[/stockquote]
GAMMONIND [stockquote]GAMMONIND[/stockquote]
UNITEDBNK [stockquote]UNITEDBNK[/stockquote]
UBHOLDINGS [stockquote]UBHOLDINGS[/stockquote]

What’s more interesting is what made the bottom of the list:

DABUR [stockquote]DABUR[/stockquote]
ZYDUSWELL [stockquote]ZYDUSWELL[/stockquote]
BAJAJCORP [stockquote]BAJAJCORP[/stockquote]
TCS [stockquote]TCS[/stockquote]
EMAMILTD [stockquote]EMAMILTD[/stockquote]
HINDUNILVR [stockquote]HINDUNILVR[/stockquote]
GODREJCP [stockquote]GODREJCP[/stockquote]
PAGEIND [stockquote]PAGEIND[/stockquote]
COLPAL [stockquote]COLPAL[/stockquote]
SPARC [stockquote]SPARC[/stockquote]

So basically, the more ‘popular’ the stock, the less of a ‘value’ it is, at least according to BtM. Also, when you work with annual balance sheets later in the year, most of the information tends to be fully priced-in.