Quality of Earnings analysis to avoid landmines in Portfolio

Why investing is not easy:

  • As they say headlines are meant to catch attention but the devil lies in the detail. Similarly investors base their decisions on ‘reported’ financials but whether they depict the true economic picture is another matter which needs special attention with a forensic approach.
  • Most of the valuation tools are based on ‘reported’ earnings which can be manipulated by use of accounting shenanigans making the valuation tools used a case of garbage in garbage out.
  • ‘News’ or ‘Stories’ often colour the investing acumen leading to permanent losses of capital like Enron.

Vikas Biyani, Associate Director Cum Investment Advisor, Multi-Act Trade and Investments Pvt. Ltd., explains why it is important to pay attention to Quality of Earnings (QoE) in order to arrive at sustainable and reliable earnings to be used meaningfully for valuation purposes and to keep behavioural biases in check by not ignoring the red flags pertaining to quality of earnings.

‘When in Doubt, Stay out’.

About Multi-Act

Multi-Act was founded in 1997 by two Wharton graduates, to develop an Equity Research capability for their own investments. Today, we employ 50 people who operate out of our offices in Mumbai and Pune and service a range of clients from wealthy families, family business owners to sophisticated investors and capital intermediaries around the globe.

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