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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » How do we choose the correct finance company?

How do we choose the correct finance company?

Go down  Message [Page 1 of 1]

Roboticfx

Roboticfx
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
After a long time, I felt to publish a new topic which will be useful to everyone and timely important.

When you are going to put a fixed deposit or any other investment, you should have a clear idea about the stability of relevant finance company and safety of your investment. It is useless to ask it from an employee of the same company as many of us do because they never tell the truth. So, how do we get to know it?  Just ask few facts shown below and you will be able to evaluate by yourself without spend much time!


1. Net Assets - Simply net assets means ownership of a company. "It must be positive". Negative values indicate bankruptcy.  Just ask "How much is your equity capital?".  If it is a positive value, that's a good sign.

2. Earnings - Ask about the earnings of three consecutive years (better 5).
                 If all values are positive(profit), no problem.
                  If two are positive and one negative, good. (last year should be positive)
                   If two values are positive, but a loss in last year - Ask the reason. generally good  but                 who knows?
                     If two are negative, last year is positive - Doubtful
                     If all are negative or two consecutive years reported losses, it's a bad sign.

3.  Interest Rate - If it offers you a higher rate than recommended by Central Bank, pay your full attention. Always remember, 'high risk at high return'.

4. Rating - Ask "what is the company rating?"  If it begins with letter "A", you can trust them. Remember to ask the year, which it belongs.

5. Quick Ratio & Current Ratio - These mean how many assets are there against 1 liability. (Imagine, you have to pay 1 rupee to somebody and there are two rupees in your pocket. So, the ratio is
1:2;
Liability(Always 1):Asset.  
That means you have ability to pay two similar payable values. Therefore, You can pay him the full amount because you have sufficient money. If you have only 50cents, (1:0.50) you can't pay him in full.

Quick ratio indicates the short term liquidity (availability of cash or cash equivalents. Current ratio indicates long term.

If both values(quick and current) are similar or greater than 1:2  -  Bright Green Light
If Quick Ratio is 1:1 while Current Ratio is greater than 1:1 (1:2) - Green Light
If Quick Ratio is lower than 1:1 but greater than 1:0.8 while the current Ratio is greater than or similar 1:2  -  Orange Light
If current Ratio Lower than 1:1 - Red Light
If Quick ratio Lower than 0.7   -  Red Light


There are many other complicated methods, but those shown above can be done by anybody without any special knowledge. Please feel free to post any other simple method you know with simple explanations under this topic.

Regards!

madurajithp


Senior Equity Analytic
Senior Equity Analytic
Thanks. A good Article. If you have analysis data, can you please share it with me if it can't be post in public?

Roboticfx

Roboticfx
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
you are welcome!

I have no analysis data, but if u want them (regarding a specific company), I will try to provide them. Please PM me. I'm unable to analyze all because lack of time.

Thank You.

Fresher


Moderator
Moderator
Thanks for the write up robo but I want to note the following

Purely going by net assets may not work as some companies might have 'over stated' and what is in the book might not be realizable. It's better to see how much interest earning assets they have compared to interest bearing liabilities.

Quick and current asset ratio may not be valid I think purely because these are financial institutions. Further banks and finance companies must maintain a correct balance of liquidity. Just enough to meet the day to day requirements of withdrawals and should invest the rest to earn interest. Having too much cash may not be a good picture either.

You are correct about earnings but then again much clearly see where it has come from. Ideally most should have been net interest.

Spot on about interest rates - People generally get excited and go with the companies which give high rates without thinking twice

Most importantly I would say is look at the size of the company. If it had a large loan book and deposit base, I can see it safer in one way than smaller once. There may be exceptions.

K.Haputantri

K.Haputantri
Co-Admin
Thanks Robo & npp for your timely and valuable contributions.

Harry82

Harry82
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Following Finance companies satisfying the rules
CFIN
CDB
VFIN
LFIN
CRL

hunter

hunter
Moderator
Moderator
Good and timely discussion.

On the other hand, there could be some danger signs as well.
such as.
* Too many marketing campaigns
* Using popular figures (people) in their advertisements.
* Use deadlines for offers (Invest before this date to get higher rates)
etc.

FALCON

FALCON
Senior Equity Analytic
Senior Equity Analytic
MBSL subsidiary of Bank of Ceylon, the largest state owned

Harry82

Harry82
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Their profit is not strong

Richie


Senior Equity Analytic
Senior Equity Analytic
MBSL is another white elephant bad badly run institution and we hear its full of malpractices and irregularities ..

Big strain on bank of Ceylon... Wonder why COPE had not touched this institution .

madurajithp


Senior Equity Analytic
Senior Equity Analytic
Thanks Roboticfx. It is very generous of you.
Actually i don't have a idea of certain finance company yet. but after your post i learn that it is useful to have a general idea of finance companies. So we can be confident if we are going to invest on certain organization or we could help others if we have analysis data. I'll keep in touch.

Thank you Smile

salt

salt
Vice President - Equity Analytics
Vice President - Equity Analytics
How about ALLI?

Chanuque

Chanuque
Manager - Equity Analytics
Manager - Equity Analytics
You are right, SALT ..
What do you think of Alliance Finance PLC .. Your valuable snapshot please ?

salt

salt
Vice President - Equity Analytics
Vice President - Equity Analytics
I am bit skeptical about whole finance sector and CBSL's mismanagement of whole issue.

Keeping that apart, I like PLC & CFIN, because of their strong position in the market place, brand equity , financial position ( simply large) & channel network.

ALLI, I have not heard anything wrong, but it has no big presence, But, they are a mid size player with about LKR 18 billion assets.

Worry is about LKR 2.8 billion gold loan portfolio though it could not offer immediate threat, it will affect the medium term profitability in a situation where vehicle market is stagnant for some time.

SL.Market

SL.Market
Vice President - Equity Analytics
Vice President - Equity Analytics
Every time Robo coming with a good job here

Roboticfx

Roboticfx
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
npp wrote:Thanks for the write up robo but I want to note the following

Purely going by net assets may not work as some companies might have 'over stated' and what is in the book might not be realizable. It's better to see how much interest earning assets they have compared to interest bearing liabilities.

Quick and current asset ratio may not be valid I think purely because these are financial institutions.  Further banks and finance companies must maintain a correct balance of liquidity. Just enough to meet the day to day requirements of withdrawals and should invest the rest to earn interest. Having too much cash may not be a good picture either.

You are correct about earnings but then again much clearly see where it has come from. Ideally most should have been net interest.

Spot on about interest rates - People generally get excited and go with the companies which give high rates without thinking twice

Most importantly I would say is look at the size of the company. If it had a large loan book and deposit base, I can see it safer in one way than smaller once. There may be exceptions.
1. Net assets doesn't show its earning ability, but I suppose it is good to have a quick idea about its equity against its liability. Mostly, negative values are generated by accumulated losses hence it can indicate the earning history although currently they earn profit.

Here, you are correct because, if there's a negativity in retained profit or any other reserve, it can be merged with positives, and shows a positive answer @ total net assets. However, if company has acquired losses continuously it would not be easy to do a such strategy and if it has done such thing which is material, it would not much difficult to capture it @ auditing. And also, we consider earnings in last three or five years so there is low risk to mislead.

It is not easy to recognize interest earning assets by a very normal person because different companies follow different methodologies. The risk of including material misstatement which reason to show false operational output is prevented by consider earnings in last five years.


2. Having too much cash is better than having least. We also consider current ratio at the same time with quick acid ratio hence it can give out a proper view on current assets as well as non current assets. The connection between them can be shown as follow.

Q.R.< std [not much liquidity risk] & C.R>std = Company maintain proper investment plans.
Q.R.>std & C.R.< std = Company looks stable in short term but skeptic in long term.

std = Standard

3. Much complex analysis can be done through company earnings but need a lot of time and knowledge. Earnings in past years are studied and if they have not fluctuated much, it's not much wrong to think that it shows a fair view. It is too much difficult to earn equal profit from non interest methods such as sale of fixed assets in every year.

4. Large ones looks better than small but golden key incident makes it invalid. (I have another example but cannot publish here)

5. Credit Rating gives an reasonable assurance on our self evaluation.

If you have any disagreement with my ideas and facts, don't hesitate to publish them.
Thanks for your collaboration!Smile 

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