Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

Interest income (usually shown as “other income”). Check the cash and investments figure on the balance sheet. If the interest income is not at least equal to the bank’s fixed deposit return, then analyze it deeper to see where the company has invested its cash. Interest expense. A low-interest expense or a high-interest coverage ratio in isolation should never be taken at face value. Always check whether the company has been capitalizing the interest cost. Multiply the total debt figure by the prevailing rate of interest for similarly rated corporations and compare that figure with the total interest expense number used in the calculation of the interest coverage ratio. Employee cost. In fraudulent companies, the reported figure may be grossly out of line when evaluated against the existing number of employees stated in the company filings or on the website. Other expenses. Several miscellaneous expenses are aggregated under this heading, which makes for a rich conduit for leakage. A sharp rise in “other expenses” in a depressed market or slowing economy could point to money being siphoned off. Taxes. The tax payout ratio should be near the standard corporate tax rate. If it is low, then check whether the company has accumulated losses from the past or if it is enjoying tax incentives from operating out of a special economic zone or other tax-advantaged jurisdictions. Net profit margin. The higher this margin is, the better. Be wary of companies that show high sales growt...