The basic reason why a company exists is to market and sell a product or service and to make profit from out of those sales/services.
- Bajaj Auto sells three wheelers and two wheelers
- Infosys sells software services to its clients both within and outside India.
- Bharat Petroleum makes most of its revenues and profits from sale of Petrol and Diesel.
From an investment perspective, we are interested in those companies that can increase their sales year after year and quarter after quarter. The trend should be an increasing one. Their business model and their product should not be an easily replicable one. The more the barriers to entry, the better it is for the company. The company itself should be in a position to increase the prices of its products without losing customers. This can happen only if the quality of the product/service offered by the company is world-class and Supreme.
As an investor, we should be in a position to understand the utility of the product/service a company sells and the business that the company is in. If we cannot explain in clear terms what their products/services are and how it benefits their customers, then we are better off by not investing in such companies.
Besides, we are on the lookout for the companies that develop products which can meet the needs of people not only within India but also elsewhere. A company that has both domestic and international presence would be an ideal investment choice for further analysis.
Therefore, sales growth is the most influential factor when analyzing companies listed on the stock market. The higher the sales growth, the better are the chances for the company to survive odds and bad economic situations.
At the same time, we are not interested in companies that spend heavily on Research and Development activities.
Sales can be Organic and Inorganic. Organic sales are revenues generated from the Core business of the company. Inorganic sales can be mostly from non-core activities such as investment income and from acquisition of companies in unrelated business.
At Indiastockanalysis.com, the Indian companies with Sales growth over the last five years of greater than 25% have a better rating than the other companies where the sales growth is, say, less than 5%. Our rating system identifies companies that can keep growing their sales numbers rapidly and at higher rates.
Net Profit Growth
Sales growth is of no use if the increase in sales do not result in an increase in profit. Besides, a rupee of sales should lead to higher rupees of profit. This is the net profit margin.
Increase in Net Profit is a result of two factors –
- Curtailing costs and
- Increasing the price of products or volume of products sold.
The companies that increase their net profits by cutting costs cannot sustain it over a long period of time. Net profit increase through cost cutting shouldn’t be seen as a good sign. While cutting costs is absolutely essential, but increase in net profits which do not show and which are not as a result of increase in sales should not be favored. This cannot continue for long as there is a limit to how much costs can be cut.
We are most interested in investing in companies which show a growing Sales and also net profit trends. Net profit is what is left out after meeting all costs including finance and Selling costs.
Net profit is a variable that can be affected by changes in cost structure, price and volume changes of the products or services that the companies sell.
At Indiastockanalysis.com, we rate companies based on how well the net profits have grown over the past five years. We focus more on companies that are not only able to increase their sales and net profit but also the net profit margins year after year and quarter after quarter.
Ratings are extremely important because unless we rate companies based on several factors, it would be difficult to identify the best companies from out of 3000+ companies traded on the Bombay Stock Exchange (BSE) and National Stock Exchanges (NSE)