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Sales Growth of Company
Yesterday, i was attempting to modify our Rule #6.
I am actually elaborating on the types of profits to look for.
Prefer *consistently profit making companies*.
Look for companies that make profits (in particular operating profit, profit before tax and net profit)
- profit before tax* is the profit made by the company before paying various types of taxes (such as Corporate tax, service tax etc.)
- net profit* = final profit after subtracting interests, taxes etc.
Usually, by profit we mean *Net Profit* only.
But to understand if the company is operating well and doing business properly, we should consider operating profits as well.
- Operating Profit* = Profit from the actual business operations (and not by way of land sale and getting real estate gains)
For example, Operating Profit for a Bank will be Interest income for the loans and advances it gives.
For ONGC, revenue from sale of oil it drilled is the operating income.
For BPCL, revenue from sale of petrol and diesel at retail outlets is its operating income.
On the profits part, do we look at Standalone or Consolidated?
The REC screenshots shared earlier were showing Standalone.
If the company is a simple one without subsidiaries or if the subsidiaries are also listed companies, we need to chose Standalone numbers.
If however the company has several subsidiaries and most of them are unlisted, then the consolidated numbers are to be checked.
In general, Standalone numbers will tell about the performance of the core company.
Also, in general, it will be better to check Standalone numbers for quarterly results and Consolidated numbers for Annual results.
In US, the dividend income is taxed which is not the case in India but still why so much stress on dividend paying and yield?
Not every company pays dividend.
Dividend paying nature of the company shows it values investors, particularly small retail investors.
Further, they are some companies like NMDC which pay huge dividends we cannot ignore.
In fact, there are mutual fund schemes exclusively designed to invest in dividend making equity companies.
.. Also, it doesn't go with our strategy with MFs (where we prefer to go for regular direct growth schemes for long term).
A Mutual fund is a collection of several securities (equities). The performance of the mutual fund depends on several equity shares underlying it. Hence, when it comes to mutual funds, we focus on the growth aspect there. Dividend option could be chosen there when we want regular income or expecting returns (from our own fund money). Investor can opt for dividend plan if he wants.
An equity share, because of its volatility nature, cannot be guaranteed to give similar performance in future. So, better to enjoy the dividends whenever we get paid. Investor cannot demand a dividend even when the company has profits and surplus.
In order to check the profit making company ,is it ok to consider Compounded Profit Growth over 5 years ...or only quarter wise operating profit figures should b considered.
The selection of the profit numbers to compare depends on the type of business. I generally look at annual profits
Because cyclical businesses might not make profits every quarter
Now, New Rule
Rule #9: Look for companies that are constantly growing in terms of Sales growth.
Sales mean the company is able to do business and get some revenue.
Sale growth will mean increased business (compared to previous quarter or previous year).
This means the company is able to increase is revenues by selling more products and services.
Sales growth is an important criteria of a growing company.
Screener provides quarterly and annual sales numbers of the company.
Lets see the sales growth of REC Ltd
Compounded Sales Growth:
10 Years: 26.61% 5 Years: 23.17% 3 Years: 20.44% TTM: 12.74%
We can notice that the company is an established one and its sales are growing good.
We need to prefer companies with consistent track record.