Thursday, 14 June 2012

The In(fy)vestor

Investing in stocks can give you great rewards in the long run. Let’s see a little bit in detail about the Infosys Investor. To see why an investment in this company has given such a high return on investment we will take the help of the company data available to public from the past 9 years (i.e. from 2003 to 2012). This can prove as a good example while you are learning to invest in stocks.

When learning to invest, it is good to look for certain key characteristics of a company before going further. These are :

  • It is debt-free or a very manageable level  of debt.
  • A very good balance sheet with growing networth
  • Its financials are better deleveraged.

As Infosys continued its growth it funded its growth by raising additional equity or by using retained earnings. This is a good sign. It means that the company has remained debt-free overtime. Normally any company takes the route of raising funds by equity and also some amount of debt to take care of its expansion. In such a case the investor has to see keenly that the debt is not too much and clearly manageable in the visible future.

Now, if we look at the sales growth of Infosys from 2003 to 2007, it has maintained the simple average of 38% sales growth and the sales grew by 3.63 times approximately during this period. In the same period the profits of the company grew by about 4 times. All this resulted in maintaining its share price even though the company issued fresh equity for additional funds.

Value Stocks :

It is a sign of a good company that it is able to maintain its operating margin  (EBITDA) as it can grow without much debt or be totally debt free as in the case of Infosys.  This parameter when viewed in conjunction with the company’s sales growth will give a very good estimate of the company’s future earning growth. It will give the potential of the company’s performance in the coming years. If the figures are good then the investor can easily say that the stock price of the company is poised to reach new levels and that presently the stock price is undervalued i.e. trading less than their worth as per their fundamentals. Stock investments in such companies are a safe bet. They are called value stocks.

Growth Stocks :

Growth stocks trades at a high price to earning ratio (Where earning is read as the Earning per Share), because any company’s share trades with the future earning estimate known as future forward earning growth. A good company always improves its performance, expands its operations and sales and grows its balance sheet overtime. In the process it becomes a growth stock from a value stock.

Transformation from a value to growth stock :

Presently Infosys stock may be trading upto 4.5 times its price compared to 2003 levels. In the years from 2003 to 2012 Infosys has maintained the EBITDA margins of 33% to 34% and net margin of 27% to 28%. This earning has in-turn reflected itself in the EPS, Return on Equity and also regular dividends from last 10yrs. It was a value stock in the past years  and a safe bet for long term investors until it became a growth stock in present times as currently it is trading at industry premium price.

Even if somebody had invested in the company in 2003 which is 10 years after its initial IPO, he/she would be rolling in money now.

Conclusion :

We can conclude by saying that long term investments in stocks can give good returns. Learn to invest in good stocks. They can be either value stocks or growth stocks but should have relevance to the sector in future. The company fundamentals should also be good. You can visit our section on Learn to Invest to know more about studying the fundamentals of a company.