In any investment, the parameter that matters most is “cash flow”. Many investors tend to get carried away with the flow and invest at the bull market’s peak. Irrespective of the numerous variables that the market may throw at you, the fall from the bull market to the bottom of the bear market cycle underlines the importance of cash flows in various companies.
Mistakes help you grow more than everyday experiences. Fund managers get a reality check on their understanding of the stock markets. The adage “Top line is vanity; the bottom line is sanity, and cash flow is reality” highlights the truth of sudden and unforeseen stock market tumults.
Aniruddha Naha, Head of Equity, PGIM India Mutual Fund maintains how the bear market rally prompted him to do a reality check of how the stocks fared by looking at the cash flows of various companies. The bear market pull shifted the focus from Profit & Loss statements to how much cash a company has to evaluate the strength of the balance sheet. Businesses with higher historical operating cash flows are more likely to survive a downcycle. So, one must ideally look at the cash flows followed by the details of assets and liabilities in a balance sheet and finally the profit and loss statement.
Naha is not a newbie in the mutual fund industry. He has been scanning the financial statements of companies for the past 13 years. His long stint with Mirae Asset Investment Management and previously at the DSP BlackRock Investment Managers Pvt Ltd explains his strong business acumen and proclivity toward balanced investments instead of a blind, rash approach toward stock purchases and sales.
|Mutual Funds managed by Aniruddha Naha|
|Scheme Name||Three-year returns (in %)|
|PGIM India Midcap Opp Fund-Reg (G)||152.5|
|PGIM India Midcap Opp Fund-DP (G)||166.2|
Check promoter participation
Aside, to understand the quality of mid and small-cap investments, one must check how focused their promoters have been. Checking a company’s history is also important because it helps forecast its earnings as well as gauge its forward-looking valuations. Instead of blindly going over cash flows and earnings from companies, it makes more sense to evaluate companies through business cycles and check how they have fared during market swings. This will lend a better insight into how a company is likely to perform in future business cycles.
Important lessons learned
To understand any business, look at its cash flows and the quality of its working capital cycles. Checking for its cash flow generation will help decide if it is worth buying or not. Don't get too caught up in the valuation concept; good businesses are worth buying at any price as long as they continue to generate profits for their shareholders. However, take care of companies with too high valuations as expensive businesses can make a dent in your profits.
There should be no end to your regular learning. This is especially true in today’s times as business cycles develop alongside challenging macros and disruptive technologies. No matter how fancy businesses may sound, you must stay away from companies with inadequate and erratic cash flows. Experience matters as it gives way to expertise. As you evolve as an investor, you make fewer mistakes. Just steer clear of unwarranted noise and let your curious mind do all the digging.