Monday, October 25, 2021

Look 'inside' the profit numbers, before investing

Dear Investor, look at company results from business profit and financial profit, before celebrating and taking investing decision.

Let me explain.

'Profit' is directly related to either or both of the three - (for simplicity, out of multiple)

A- Sales increase
B- Cost reduction
C- Asset sale

Cost reduction, includes-
A- raw material cost
B- interst rate cost

Cost reduction in raw material is mostly temporary either (unless some longterm actions were taken in the past, like backward integration) , and interest cost reduction could be cyclical and so again temporary.

A company may even choose to sell a factory unit, a subsidiary, a brand etc and monetize and then book the profits,which forms as profit from asset sale.

It is not that it is not good and I am not saying the profit figures are adjusted or rigged, I am saying ,If you are looking for longterm investment, the business needs to be majorly growing from sales revenue and higher and consistant the % of profit growth from business, better it should be to invest for longterm.

Disclaimer - profit is just one of the various factors in the process of evaluating and making buying or selling decision and not the only one.Since for most investors profit growth % or numbers and even reports headlines highlight the same, I have expressed my views in investors benefit on profit growth understanding.

#investing #personalfinance #financialplanning #financialfreedom