A suitable example will help much. - Well if you are asking this question, after witnessing the recent spate of balance sheets presented by most listed companies, we are in sync with you. Off late, this is the most frequently used word across all balance sheets, but is it being used according to accepted accounting principles, is some thing that remains a subjective word.
According to the books of accounting principles, “Write-offs” are an accounting strategy that allows for the reduction in value of an asset or as a means of removing bad debt from the financial records of the business. This principle of write off’s actually came into practice, to help companies denote an accurate price of an inventory level against the worth of the current assets of the company. A company may encounter a situation where a client encounters financial hardship, and is unable to pay for goods or services rendered. This creates a situation where the invoice for the services continues to remain on the books of the company as an asset. When it becomes clear that there is no chance of collecting on the outstanding invoice, it is advantageous for the company to choose to write off the amount of the invoice as a ‘bad debt’. But mind you, this can be done only after repeated attempts for recovery & only then using of this principle be justified.
For Ex: A production machinery capacity in an office has to be written off, after using it for considerable period & once it starts wearing out. Coz initially when the machinery was new, it could have been used to extract 20 units/hour. Now that, this machinery is 10 years old, the maximum extract is just 10 units/hour. Remember, if you don’t write this item off in the balance sheet, the over all monthly & quarterly production numbers will be hit.
Hope fully, our little effort to express the meaning of this word, in the simplest of words is within everybody’s reach. And off course, discussing this word with all its nitty gritty’s is something which we count as an impossible task, given a short contextual space here. Feel free to write to us, in case the point you were looking for, if it’s still left unanswered.
Some people describe the current economic condition as a “Recession” & some call it a “Depression”. What exactly is the difference between them & which one best describes the current market?
Yes indeed, there is a key difference between the actual meaning of these words & when they should be used. Generally, a recession in the economy is far less severe than a depression. It is marked by a decrease in a country’s Gross Domestic Product (GDP) over more than one quarter of a year. A rise in Inflation over a considerable period of time results in recession. But where as, a depression is measured as a decrease in the GDP of 10% or higher in a given year. Now understand this correctly, if the GDP declines by 10% or more consistently over years it could be called as depression. Thus, one cannot accurately describe a quarter decrease of greater than 10% as a depression unless the same conditions exist for a year.
I do not recollect when India was into depression according to history books, since the “India developing story” began just about a 2 decades ago. If some thing could be characterized as a recession period in India, it should be the period during 2002/03 & this could be the only one. So if you had come across people using words such as depression in “India’s growth” context, chances are low that they could be correct. But one biggest depression documented till date is the Great Depression in US in 1930’s. & coming to recession, the US economy has experienced frequent bouts of recessions.
These are words which are completely characterized by the economic activity of a country & mostly used in context with “the developed” & “developing” economies of nations across the world. So analyzing the condition in US, it’s surely into a deep end recession & it is rapidly progressing towards being called a depression very soon. I guess, more clarity could be derived once when US finishes its Q4 earnings revelation cycle by the end of January, so that a correct annual GDP figure can be constructed.
How does “The Club Sharewala’s” research see the Satyam story to span out in the coming days?
There are few pointers which we are closing watching & the expected turn outs of these pointers is what we strongly believe will turn out to be Satyam’s fate in the long run.
1> Satyam has entered into corporate bad books, due to its inclination to fraudulent accounting principles but the company still stands amongst the top names when the debate is about serving its clients. So it’s this space, that can turn out to be fruitful if the new management tries to restore confidence amongst its business clients for new projects.
2> Now, even if the best of management team is now formed, meeting its necessary funding needs is something that can prove to be a challenge. But there is still a way out. :) As you all know, the new board set by the government is headed by Mr.Deepak Parekh, who is the current chairman of HDFC bank. It’s this man, who will have first hand information about Satyam’s true books of accounts & at times when the books of accounts are satisfying, he can help the new management to get access to HDFC bank. Don’t forget, all loans are assets from banks point of view while it is treated as a liability in the books of a company.
3> Now, comes this most important but a little tricky equation according to us. Getting a corporate company closer to government setup like in India is not something we would fancy. You know about how good or how bad the political setup in India is, so we are not talking about that. J But our point lies in, how much of involvement the government bodies will have in the corporate governance module set up. Okie, don’t worry we will give you an example.
Ex: Let’s call the government set up in India as AAA & corporate body like Satyam as XXX. You know that, if XXX needs any waiver in a project set up’s stage, AAA has to be involved to get the project papers moving. Now just consider what if AAA knew, everything about XXX & also about its profit margin… since he had a chance to have a closer look at all projects that XXX undertakes. Okie, we shall stop at this point & coz we still aren’t too good to match reality with examples. :)
Why are Indian economists so excited when Stimulus packages are passed in foreign countries, is there any ways India could benefit from those packages?
The economists in India, certainly have reasons to get excited when stimulus packages gets through in foreign countries. Even though the benefit might not be directly linked, it definitely has behind the scene implications. Take a look at the below example, which explains my point better.
Guess most of you are aware about the news of $300 billion bail out package, which is expected to be announced shortly by US presidential candidate Mr.Obama. Now try doing this simple logical analysis of this situation. You must be knowing that, any bail out package released into the economy … is just to increase the spending power of the companies, so that their businesses become more profitable in the long run & this ultimately helps in stabilizing the over all economy. Now you surely know that, the money will be spent by companies… your next task is to analyze on what those companies will spend on.
During the recent cabinet meet, there was news from government spokesperson in US, suggesting that $300 billion would be spent to revive housing related companies. So now the spending power lies with housing companies. India is the prime supplier key metals such as aluminium, copper & steel to the US housing companies. Now this news is certainly positive for Indian companies such as Hindalco, Sail, Sterlite Industries, Tata & Jsw steel … as they are the leading producers of the required metals for US housing companies. J The equation looks simple, but carefully mapping it & establishing links between all sectors in an economy … is something that can prove a little daunting at times & most often all the time.
Is it a good thought to buy Satyam, as its stock price has come down to a great extent from where it was?
This is quite a tricky question, which forces me to act diplomatically while I provide answers to such questions. So I wish to answer this on an open ended note by presenting my view, rather than a close ended answer with just a “Yes” or “No”.
If I were an Investor who believes in Contrarian Investing habits, Yes I would go ahead & buy this stock. While a do this, I would make sure to keep these strong points in mind to help me evaluate my buy stand. 1> Check if the stock price has fallen drastically or an abrupt nose dive. Most often, the momentum a stock takes to fall drastically or abruptly will be always equivalent to the chances that the stock prices bouncing back in a similar way. 2> A Contrarian investor is not a person, who always disagrees with people around him. So if people around me, have a reason to believe that the stock price of a company may fall, they surely may have a reason but evaluating “that possible reason” is something which I specifically have to do, before I call my decision an “Ace”. 3> A close look at business Model of the company & how it’s new incoming projects might be affected by this news & which may cause a slowdown is something that I should think about.
Well, if I were a normal investor I certainly had a role to play in that capacity too. 1> Always make sure, to completely trust the person who gives me information. 2> If my intention to buy/sell was due to influence of news papers / Journals I would make sure to keep a close tab to all such news that sparks out from that source. 3> If it was from my stock broker, make sure to stay hooked with him for all hot news for he might have & make sure he doesn’t forget to update me.
You see, either of this role you may choose to play as an investor, it has it’s own act which you should learn. So going by, Satyam’s point of view we would be glad if few points expressed above might help in coming close to decision making else feel free to leave us a mail before end of day today. We shall work with you.
All queries could be directed to Analyst@theclubsharewala.com. Topic on US economy is wide opened for everybody to comment up on. Please write to us, if you had a different view on this or if you felt that this issue has another phase which is never seen.
