How to make sense of earnings season  

Share prices move in tandem with profits. They do not care about anything else. There could be a short-term trend of volatility.

Published: 07th August 2023 08:27 AM  |   Last Updated: 07th August 2023 08:27 AM   |  A+A-

express illustration: Sourav Roy

Express News Service

Share prices move in tandem with profits. They do not care about anything else. There could be a short-term trend of volatility. However, in the long term, share prices fall in line with the trend of corporate profits. Over 10-15 years, companies with solid businesses have delivered profitable growth. They are best equipped with short-term situations related to high raw-material costs, interest rates or any other industrial issue. They find their way out and continue their work.

The design of a company is to minimise risks and maximise profits. The sector where the business operates does not matter. The company management’s job is to grow the business and profits. As an investor, you can take a slice of the company’s profits by committing your savings. You can either directly buy shares or invest through mutual funds. When you invest, you give your money a chance to grow.

As we often advocate, you need to add the edge of knowledge to your investments. There are so many ways you can gather helpful information about solid companies. You need to look up businesses that are bullish on the path ahead. You can rely on your stockbroker to filter companies for you. The other option is to work with a financial advisor who can recommend shares for you to buy. If you research independently, one way to start is to list companies you wish to track and eventually invest in. You can look up and read their quarterly result announcements to track their performance.

Along with quarterly financial performance, companies also publish a conference call transcript with market analysts and investors. They answer questions that are related to the performance. You may not understand everything that is said in that transcript. However, you can look for words that elaborate on ‘growth’, ‘demand’, ‘outlook’, ‘risks’, ‘margins’, and ‘costs’, among others. You need to look for hints that suggest the company is on a growth path and that risks are low for future profit growth.

For example, in the latest result transcript, Maruti Suzuki, the biggest carmaker in India, told analysts that the company grew by 12% in the first quarter of 2023-24 against an industry growth rate of 7%. The momentum is likely to continue, the transcript said. Similarly, Tata Motors indicated that the demand for auto products across categories would remain strong.

An important aspect that hurts your investments is inflation. It affects consumers as their income goes down, and they cut spending. That further hurts businesses as the demand for goods and services slows. The other way inflation hurts companies is the rising cost of inputs. If companies borrow more money from banks and other resources, they have to pay more interest. Top businesses know how to manage costs and rising prices. They communicate well and continue to perform. Hindustan Unilever, the biggest consumer company, makes 37 references to how inflation affects the company in the conference call transcript. 

The challenge is to choose the right company to create an all-weather portfolio. A diverse group of fundamentally strong shares are perfect for that investment. You can pick shares in the S&P BSE Sensex or NSE Nifty and create your portfolio. Shares that make up for these benchmark indices are usually sector leaders or fundamentally strong businesses.

The idea is to buy, hold, and add more to the number of shares you own over the years. The other simple way is to own the benchmark index like the NSE 50 or S&P BSE Sensex. For example, if you invested in the Nifty 50 index fund in August 2008, your money would have multiplied five times. It would jump multi-fold if you allocated some money to technology companies directly or through the Nifty IT index. A much broader allocation to a Nifty 500 index would not be beneficial. The performance of the Nifty 500 index was flat for 15 years. During the same phase, gold was appreciated four times. The above analysis shows that not all equity investments can generate high returns. You need to ensure that you allocate your hard-earned savings to top businesses.

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