I was walking out of the classroom when one of my students approached with a seemingly innocent but extremely thought provoking question- how to analyse news on companies? Very pertinent to a management student yet it happens to be a very loosely addressed issue. It did make me think and here is my honest attempt at creating a framework for analysing news. I would like to break the exercise into three steps and give the readers time to internalize the process, as the ability to categorize news depends on their ability to relate to business situations.
The first step involves mapping the news with nature of financial activity involved.
There are three basic financial activities that any company is involved in:
1. Raising of money and servicing the money raised – Financial activity
2. Expenditure which increases future earning capacity and income from selling such asset- Investment activity
3. Income and expenditure as a result of day to day operations is known as Operating activity
When any news is announced and you want to understand the financial implications of it, the primary step is to categorize the news as- financial, investment and operating. Here are few examples, taken from Google news:
- UK: Cargill eyes UK growth through capacity expansion
Link: http://www.just-food.com/news/cargill-eyes-uk-growth-through-capacity-expansion_id125021.aspx
The following news refers to Cargill, an agro-based company expanding it’s operations in UK. Any expansion news pertains to investment activity as expansion necessarily mandates investment.
- Rolta to raise over $200 mn through overseas bond issue
Here, bond is a source of raising funds. Hence, it can be deduced that the company is raising money through bonds. Hence, this news pertains to financing activity.
- Kellogg to cut down jobs by 2017 as part of ‘cost-cutting plan
Salary is an expense which is met on a monthly basis and is recurring in nature. Hence, salary can be treated as an expense relating to operating activity. It should be remembered that operating activities impact profitability directly.
My advice to all those who are students of business analysis is that you should spend at least a week in slotting news in different categories.
Now we move on to the next, slightly complicated part of it: How to analyse news pertaining capacity expansion?
Let’s take an example to illustrate this: “India Cements plans to expand its capacity in Rajasthan with the possible investment of around Rs 650-700 crore to cater to increasing demand in Gujarat and Madhya Pradesh” – Source: Business line Feb 14th,2013
Investing Angle:
If we look at the news the first thing we realise is that the company is expanding its operations. So the news relates to investing activity as the company is augmenting it’s future earning capacity. Here, we should realize that Rome was not built in a day hence the process of capacity expansion would take more than 1 year. I believe it would take at least 3 years.
Financing Angle:
Now the amount required to expand is INR 650-700 crore. The amount can be raised through the following sources,
· Internal Accruals:
Internal Accruals refers to the profit that the company has not used over the years. Here the best indicator would be the cash and bank balances.
If you look at the balance sheet of the company for the years 2012 and 2013 at moneycontrol.com you realize that the company has hardly INR 5 crs. Hence it is not possible for the company to raise the amount through internal accruals.
· FPO:
Follow up Public Offer (FPO) refers to the process of raising money from the stock market. With Indian economy yet to show signs of growth, the market might have not been receptive to an IPO in and around February.
· Debt Instruments:
Debt instrument refers to raising funds through borrowings. Borrowing comes with an obligation, in form of interest payments. If the company has huge debt as is the case with India Cements raising further debts will be a herculean task. It could also increase the pressure of performing with an increasing interest rate scenario.
Spend few days keeping your eye strictly focused on these dimensions. Get your hands on the newspaper that interests you the most in terms of news related to the economy. Go through it daily. Chart down your observations. Analyse them and re-scrutinize wherever you see slight digress or doubt. You will soon gain an eye for understanding news pertaining to companies. There is nothing extra-ordinarily interesting on the surface. Allow yourself go deep, explore and gain meaningful insights. That is where the real news lies.