Value Investing: A Killer Puzzle

Taking a page from the popular US TV serial Breaking Bad, Kewal Kiran Clothing, a low-profile Indian listed company with a high-profile Killer Jeans brand (and a few other ones as well), announced on its Facebook page a week ago: I am not in danger, I AM THE DANGER.

Sounds like an empty threat no?

But hey look what this company’s balance sheet look like.

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david einhorn, reading, valuewalk, internet, investment research, Greenlight Capital, hedge funds, Greenlight Masters, famous hedge fund owners, big value investors, websites, books, reading financials, investment analysis, shortselling, investment conferences, shorting, short biasIt has not just been rough year for David Einhorn's own fund. Einhorn's Greenlight Masters fund of hedge funds was down 3% net for the first half of 2020, matching the S&P 500's return for those six months. In his August letter to investors, which was reviewed by ValueWalk, the Greenlight Masters team noted that Read More

What a sexy balance sheet! No net debt. And net operating assets (invested capital less treasury assets) of only Rs 89 cr. at the end of FY 13 and Rs 112 cr. at the end of FY 12. So, average net operating assets employed was only Rs 101 cr. Why “only Rs 101 cr.?”

That’s because that such a low amount in relation to what the company earns.

In FY 13, the company earned a profit before taxes and other (mostly treasury) income of Rs 65 cr. Why did I reduce other income? Because I want to compare what the company earned from the business with the average net assets employed by that business which we earlier estimated at “only Rs 101 cr.”

If this was a mediocre business earning only a pretax 10% return a year on net operating assets, the quantum of those assets needed by the business to deliver earnings of Rs 65 cr. would have been Rs 650 cr., right? But this company’s killer balance sheet shows that the company employed net operating assets only Rs 101 cr.!

That translates into a pre-tax return on net operating assets of 65/101 or 64%, which when compared to AAA bond yields of 11% or so, looks stunningly good, no? But, are these earnings real or just an illusion?

Let’s find out by checking out the cash flow statement.

Earlier, we had estimated average pre-tax operating earrings of Rs 65 cr. Over FY12 and FY13. Now, the above cash flow statement confirms that those earnings were real.


A Killer Puzzle

Via CSInvesting