Firms that know how to respect money

Enter a market when others are rushing in, you could end up buying at high prices.

The markets are crashing – both equities and commodities. Gold, which remains the only investment that appears to make sense, has been pushed underground by the diktats of the finance ministry. Property prices are in a slump. So where do you put your money?

We decided that this could be the best time to pick up stocks which could be going at their lowest prices. We have selected some companies on the basis of some very sound principles.

We only looked at companies that had an asset base of over Rs 100 crore. This way we eliminated companies that could be listed today, and could disappear tomorrow.

We selected companies that had an in-built respect for money. It does not matter whether the money comes from shareholders, from banks, or is with the company either by way of accumulated reserves or accumulated depreciation.

Money is money. And if it cannot earn at least a 12% rate of return, you should not be looking at that company.

We were aware that some companies have money invested in assets which could become productive a couple of years later. Hence, we have deducted capital work in progress (CWIP) from total money with the company (equity + reserves + total borrowings + accumulated depreciation less CWIP). This way we get total money that could be put to productive use. We have selected only those companies which have been able to meet this benchmark of a 12% return on adjusted capital employed for three years continually.

We then took companies that had the highest rates of return on adjusted capital employed. The top 25 firms that earned the most on the money they had are featured below.

Look at the price ratios next. Ideally, you should be looking at companies which are available at the biggest discounts to the current market price, or are the lower (or closest) to the 52-week lows or the 52-week average prices.

If you like the firm and the current market price (as a ratio of the 52-week highs, lows and averages), they could be the shares you should be purchasing right away.

The best time to purchase shares is when the ratios appear right, the company is good, and others are too scared to enter the market. Enter a market when others are rushing in, you could end up buying at high prices.

DNA/ R N Bhaskar