Decoding raw data

28th February
I am yet to figure out whether Professor Calculus is a friend or a foe. He has effectively punctured the bubble of happiness (okay, a bit of smugness too) on my great start to stock picking. This is what he said: "So what if 70 per cent of your stocks registered an increase in profit. Your portfolio will not grow by the same proportion. After all, you invested just a couple of months ago." Yes, I know. Even a newbie can figure out that the price at which you buy a stock decides the scope of returns, even if the company is a bluechip. But the results proved that I had chosen winners in my first attempt, reason enough to make me ecstatic. Then came his punchline: "In a market that is going up, anyone can start with a bang. Wait for a correction and then we'll see how your portfolio performs."

6th March
With Professor Calculus' challenge echoing in my mind, I set out to investigate what was wrong with the three non-performers in my kitty—Britannia, Tata Steel and HCL. But I encountered a more fundamental problem. All the information on my stocks' performance came from newspaper reports on various sectors. Any further analysis of the limited data in the tiny tables listing out the performance of key stocks in each sector was not possible.

The next obvious thing was logging on to the Websites of companies to give their quarterly reports a hard look. With this firm resolve, I started with Axis Bank, a company with a good report card—and recoiled in dismay. All numberphobics beware. The quarterly report is a table stuffed with numbers and categories that makes the head spin. My first reaction was to save the report on my desktop as a reality check; an analysis of such reports is enough to deflate bouts of excessive optimism. But a late-night cup of coffee can do wonders to resilience. I spent an hour poring over the numbers. I couldn't interpret them accurately, but I have a list of questions which, if answered, will help me do so. Here it is:

• Are unaudited results reliable?
• Do experts talk about growth over the previous quarter or the same quarter in the previous year? Why?
• The quarterly reports list out various types of profits. Which one should I consider to evaluate the company?
• Is the segmentation of profit important?
• How much increase in company expenses is good?
• Can't I just go by the growth in EPS?

I decided to scout for answers next week. But the coffee kept me awake, my mind firmly lodged in numbers and tables.

18th March
My dear companion in all endeavours, Google, can be agonisingly whimsical at times. Not only was it slow to throw up credible answers, it also ignored the spirit of my questions. For instance, I did not want to know the definition of an unaudited/compiled financial statement. I simply wanted to know if they are reliable. Apparently, they are. Unless there is a difference between the actual and audited statements, in which case the company is cooking up accounts and heading the Satyam way.

I have spent an arduous two-three days to find answers to all my questions. For this, I am indebted to Professor Calculus, my colleagues who have been investing for 10-odd years, investopedia.com, and Google. Here are the answers (in the same order as the questions):

• There is only a marginal difference between unaudited reports (made by company accountants) and audited ones (checked by external auditors). Hence, you can rely on the unaudited numbers for your analysis.
• The quarterly growth splashed across newspapers is the profit growth over the same quarter in the previous year. This eliminates the effect of seasonality on the analysis. Simply put, the company's growth path is considered to be more stable and consistent if its profits increase over 12 months, instead of four.
• Among all its peers, net profit or profit after tax (PAT) is king as it shows what a company actually earns after all deductions. Experts also call it residual profit. The different levels of profit are quite similar to salary structures. The cost to company (CTC) of an employee is like the gross profit of a company, which doesn't show disposable income. Just as a high CTC can, after several deductions, dwindle to an unimpressive paycheque, similarly the gross profit can be pared down at various levels. This is why it is safest to follow a company's final profit in hand, which is PAT/net profit.
• Profit segmentation is important to ascertain that the company is earning from its key business, not temporary projects. For instance, the Axis Bank report enumerated three important sources of revenue: treasury, retail banking and corporate banking. The report also gives the capital employed in each of the three divisions. So, it is easy to identify the most profitable business divisions in the bank.
• To know if a company's expenses are within limit, I should compare the growth in sales revenues with the increase in company costs. If costs have risen faster than sales, it means the company is spending more but cannot convert the extra cost into extra revenue.
• Finally, if the company's EPS surpasses the industry average and/or the benchmark, I can skip the complex layers of analysis. For, this means that all is well with the company.