With increasing debt of all 7 adani stocks, today few of them hitted 5% lower circuit. What will be the future & what should investors do or be cautious about these stocks or such other stocks / cos who are having high debt but ROE is good. if they are holding or planning to invest in this popular ADANI Group Co’s. Stocks.
Time will tell.
Personally, I don’t have any investments in Adani stocks.
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This is a game changer for India and Adani Ports.
If you try to understand the businesses, you will know if such a debt is necessary or not. Debt is required in certain types of businesses because of their nature.
So you should know why they are taking debt and where it is going, you can check the balance sheet, check the sales growth, if sales will increase in the future because of capacity expansion, listen to conference calls, read analyst reports to get another perspective etc.
No one has seen the future.
If investors don’t know what to do then they shouldn’t have invested in the first place.
Cautious means nothing in stock markets.
You either Buy, Hold or Sell.
ROE is always good in stocks which have seen recent run up.
Every investor must have his reasons and theories for holding a stock and should exit accordingly.
Any new investor in these stocks is taking huge risks in present valuations. But again Markets can remain irrational far longer than one can be rational and expensive valuations can reach more extreme levels. No one knows. But no intelligent/smart/experienced investor will enter into these stocks at these valuations nor at this time.
I can’t predict the future of adani stocks but I am quite sure about deep corrections in stocks which I have analyzed are adani transmission , adani ports and adani power .
High debt stock would always have high ROE. This is pumped up ROE.
That is because they are using debt to buy new assets and ROE only measure Return on Equity not on what is invested. It’s like measuring annual return of an investor or say of a trader on his investments/trades, but in reality that person in addition to his Own Funds is taking big loans from banks and using that for investments/trades, but while calculating percentage returns he only takes into account his Own Funds.
ROE = Net Profit / (BV of Equity - Cash)
ROCE = EBIT / (Capital Employed)
ROIC = EBIT*(1 - t) / (BV of Equiy + BV of Debt - Cash)
A better measure would be Return on Capital Employed (ROCE) or Return on Invested Capital (Book Value of Equity + Book Value of Debt - Cash) i.e. ROIC^
^ Though my personal opinion is that ROIC is better measure as it takes into account After Tax Operating Income whereas for ROCE calculation uses EBIT i.e. Earnings before paying Taxes.
For many highly leveraged companies (companies with high value of debt) you would find that their ROCE is much smaller than ROE. In cases where this is not the cases implies that the company is having smaller debt or it is holding huge cash reserve and hence debt holders have an edge over equity investors.
- The numbers and ratios might differ from source to source considering when data is captured or what is taken into consideration while calculating that number/ratio.
Never treat these numbers like Magic Number… These ratio viz ROE, ROCE/ROIC takes into account the Book Values which are not a reliable metric. Because Accounting is kind ritualistic (what I mean they do sime things or show something as Debt or Operating Expense becuase the rules says so or there is precedent for that).
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