No matter how much you stay away from Adani stocks, they definitely affect you eventually, either directly or indirectly. For example, you may have invested in an equity-oriented scheme through mutual funds. The fund manager must have included a stock of Adani group, which is now impacting your overall portfolio.
Similar is the case of index as well. Every index had included Adani stocks when they were at peak, due to which a sharp fall in Adani prices impacted your portfolio. But is there anything you could have done to secure your finances?
Well, frankly speaking, when there is a market crash at the global level, you can't do anything instead of shifting your investment from the stock market to fixed-income securities. But, when it comes to investing in individual stocks, here is what you could do to analyse whether it is the best time to exit from the company:
Low earning quality of the company
Earning quality is a measurement of a company's earning sustainability, consistency, and true and fair picture of financial statements. If the company's quality of earnings is low, even if the net profit is high, it is a red flag for your investment.
Low earnings quality can result from various factors such as accounting irregularities, creative accounting practices, aggressive revenue recognition, improper capitalization of expenses, or deliberate misrepresentation of financial statements. These practices can distort the company's financial position and create uncertainty for investors and other stakeholders.
High debt-equity ratio
The ideal debt-equity ratio is 1:2, but it also depends on the type of industry you are evaluating. High capital-intensive industries can have high debt-equity ratios, as they require considerably more capital than a service-based industry.
However, the ratio should align with industry standards. If the company you are looking forward to investing in has a higher debt-equity ratio than other similar companies, then it is a big red flag for your portfolio.
Declining earnings of the company
When a company's earnings start to decline, it becomes a major red flag to the investor not only because of lack of dividend distribution to the shareholders by the company but also because it represents a lack of liquidity of the stocks; as earnings decline, other investors may sell their shares, leading to a decrease in demand and a lower stock price.
Lengthy working capital cycle
For continuing the basic operations of the company, like the requirement of raw materials, regular machinery repair, or salary to the labour, every firm requires working capital. A cycle of working capital represents the time taken to convert net current assets into liquid cash.
A lengthy working capital cycle leads to inefficiency in managing working capital procurement and applications, leading to a lack of funds available for the investors to distribute as more funds are blocked in operations. Mismanagement of the company's basic functions could be an enormous red flag for you as an investor.
While considering the above-mentioned matrix before investing in a company, conducting a regular review of your investment portfolio is necessary. If you find any of the above-mentioned red flags in the company, you must plan your exit strategy by listening to the current market conditions.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com