MONEY TALKS

CREDIT SERIES-4- MARKET INTELLIGENCE

Case –II – Stock Market Data

Market movement of share prices and market cap is one of the most intelligent indexes especially if it’s a homogenous business and there is adequate free float.

So there was this company which was into lending for a certain asset class. Key performance indicators of the lending business – NPA levels, capital adequacy ratio, liquidity coverage ratio and provision coverage; all were good.

But somehow the market didn’t seem to appreciate that fact. It was evident from just broad indicative numbers as below without going into any fundamental or technical analysis.

Entity Total Assets Market cap/ Total Assets Market Cap/Sales Market cap/Net profit
A 1,00,000 0.30 2.5 9
B 1,30,000 0.21 1.8 13
D 88,000 0.05 0.4 4

 

We can see a clear outlier there in these numbers.  These numbers looked like something below 3 years back-

NAME Market cap/ Total Assets Market Cap/Sales
A 0.45 4.0
B 0.27 2.2
D 0.10 0.9

 

The investor community sensed that there was more to these numbers. And then if you look at the below lagged indicator, events started happening and reflecting the true position-

NAME YEAR 1 YEAR 2 YEAR 3 Outlook
A AAA AAA AAA Stable
B AAA AAA AAA Stable
C AAA AAA AAA Stable
D AAA AA+ AA- Negative

 

So especially in businesses which share common characteristics, try understand if any areas beyond the numbers only needs to be looked into.

Note: These are personal views and in no way represent the organization(s) I am (was) part of.