Some of us evaluate a vendor before entering into a transaction. Some of us don’t. Many times it is difficult to get any useful information on that vendor. Things work by word of mouth until they go bad. Broadly speaking, vendor onboarding is the process of verifying and assessing a vendor/supplier to suit your organization’s eligibility requirements. Why is it ever done? You would know why, if, you have ever faced a vendor fraud. If you haven’t yet, maybe my recent experience will help you understand.

My story:
I recently shifted to Bombay to set up the next Tofler’s office. I was searching for suppliers that could help transit some stuff. Aggarwal Packers and Movers was definitely an option but was turning out expensive.

So, after looking at alternatives in Google, I nearly finalized a deal with one company. It had an impressive website, quick response time and happy reviews. Before going ahead, I ran up 3 simple checks on the company:

1. Incorporation date: The company was incorporated 2 years back. Now that was a bit of a red flag. Mouthshut had some 1500 reviews on the company. How could there be 1500 reviews in 2 years of starting up? Other similar companies had about 400-500 reviews and they started much earlier.
2. Registration details: Looked at the company’s address, charges, capital, etc – nothing alarming. All details matched with that on the website and as communicated by the company to me.
3. Directors and other directorships:  Then I started looking at directors of the company and their other directorships. This is where the problem appeared. The directors of this logistics vendor had directorships in 50 other companies. Most of the companies were ‘strike off’. Most of them were recently incorporated and then shut down. Of those which were ‘Active’ companies, many of them were non-compliant and hadn’t filed recent financials. This definitely doesn’t say right about the supplier. Questions integrity and fraudulent intention. Wouldn’t you agree? Then the reason for so many mouths shut reviews clicked me – they were all fake and bought reviews! And that’s why they all said good about the company.

The point being
This ofcourse is a small example of how simple checks on a business could help. But my point is that even in such a small transaction, it was helpful. Then why miss it in a bigger transaction? I have often come across suspicious businesses that could be discovered by an apparent look. The problem is that we don’t look at all.

Just start with a basic process – Look at registration details, financial highlights, directors and connected companies. This could go a long way to save trouble in the future.

‘Know your customer’. It is one mantra that we hear repeatedly for successful sales closings. No secret about it. But what and how? We have enumerated 3 essential things that should be checked to prepare for a sales meeting. The sources to find such information are also discussed below. The level of preparation required ofcourse depends on the size of the transaction and the nature of the product.

1. What does the company do? – This sounds obvious but many times salespeople have no idea! Just take a minute to google about the company and its website to check what it does and identify its industry. Is anyone in that industry using your product/service already? It could help you carry the conversation in the meeting and speak suitably about your product.
2. Who is the decision-maker? – Are you meeting a decision-maker? This is easier to find out in smaller companies than for bigger companies. For SMEs, you can study the free ownership structure on Tofler.in (at the company network tab). It’s important because you are likely to run into owners/directors in meetings with SMEs. They are the decision-makers. Knowing a bit about them could go a long way. For large companies, LinkedIn could help in figuring the organization hierarchy. If not, then at least it would tell you a bit about the person you are meeting, his background, work history, and interests.
3. Financial performance of the company – There are two questions here: why and how? Why? – because it would set the tone in your mind for the conversation. How much you can ask for your goods and services? How aggressively you should pitch? How much you should negotiate? You can only understand this when you know if the client could pay well or not. Some answers you should look for:
   1. How big is the company? Is revenue growing or declining?
   2. Is the company in profits and losses? What are the margins like?
   3. Which are the major expense heads of the company? Would your product impact any head significantly?
      Now the next question – How? Due diligence companies and MCA provide this information. You can also check Tofler.in which provides a lot of this information for free on its website.

Lending has been a way of life in India. It is routine for us to lend money to businesses run by our relatives, friends or their friends. However, many of us have also been burnt in the process. Whether you would like to lend again or not is your call. But if you do, a little research about the borrower can ensure better safety of your funds. Here are three essential things you should look at before lending. None of these require you to ask any details from the business itself:

1. Financial strength: The financial health of the company over the last 3-5 years
2. Leverage: Existing debt burden on the company
3. Existing industry conditions: The health of the overall industry and its main players

In this part (1) of the article, we will discuss assessing the financial strength.  Assessing the financials of a company is a nuanced field. These are a few things you can begin with:

• Operating revenues: Check if the operating revenues have grown or declined over the last 3 years? Growing revenues is definitely a comfort but do compare them with days receivables outstanding (DRO). DRO indicates the number of days for which the payment against sales is yet to be received. For example, if an SME has days receivables outstanding of 45 days, it means it is yet to receive payment against its 45 days worth of sales. So, if sales are increasing and so is DRO, then it raises suspicion on the quality of sales. Perhaps, they are low-quality sales made in desperation and payment is yet to be received (or might not be received). Or they could be a case of fake billing to inflate revenues to show a better picture to lenders and customers. The point being, DRO shouldn’t be increasing over time. On the other hand, declining revenues is obviously a sign of caution.
• Profit margins: Look at gross (sales – the cost of goods) and net (sales – all expenses and taxes) profit margins. Are they narrowing, stable or growing? Growing and stable margins is a comfort, however, do check days receivables outstanding. Narrowing margins need a little more research. Try to ascertain the reason for reducing margins by studying the expenses that have increased. You should also look at similar companies in the industry to check if it’s a company-specific concern or industry-wide concern. Any way, narrowing profit margins is a sign of caution.
• Major assets: Check the major assets owned by the company in its ‘fixed assets’ schedule provided in its balance sheet. Are these lands, buildings or plant and machinery for the operations? They should relate to the nature and size of the business. Compare them with other similar companies in the same industry to get an idea. This will give an idea of how efficiently is a company using its funds.

From where do you get the above details?
The financial filings of a ‘company’ can be sourced from the Ministry of Corporate Affairs. You can also source such filings and reports with important financial numbers like revenues, profits, ratios over the last 5 years from tofler.in. However, if it’s a partnership or individual business, then getting such details is almost not possible.

Some of us evaluate a vendor before entering into a transaction. Some of us don’t. Many times it is difficult to get any useful information on that vendor. Things work by word of mouth until they go bad. Broadly speaking, vendor onboarding is the process of verifying and assessing a vendor/supplier to suit your organization’s eligibility requirements. Why is it ever done? You would know why, if, you have ever faced a vendor fraud. If you haven’t yet, may be my recent experience will help you understand.

My story:
I recently shifted to Bombay to set up next Tofler’s office. I was searching for suppliers that could help transit some stuff. Aggarwal Packers and Movers was definitely an option but was turning out expensive.

So, after looking at alternatives in Google, I nearly finalised a deal with one company. It had an impresive website, quick response time and happy reviews. Before going ahead, I ran up 3 simple checks on the company:

1. Incorporation date: The company was incorporated 2 years back. Now that was a bit of a red flag. Mouthshut had some 1500 reviews on the company. How could there be 1500 reviews in 2 years of starting up? Other similar companies had about 400-500 reviews and they started much earlier.
2. Registration details: Looked at the company’s address, charges, capital etc – nothing alarming. All details matched with that on website and as communicated by the compant to me.
3. Directors and other directorships:  Then I started looking at directors of the company and their other directorships. This is where the problem appeared. The directors of this logistics vendor had directorships in 50 other companies. Most of the companies were ‘strike off’. Most of them were recently incorporated and then shut down. Of those which were ‘Active’ companies, many of them were non-compliant and hadn’t filed recent financials. This definitely doesn’t say right about the supplier. Questions the integrity and fraudulent intention. Wouldn’t you agree? Then the reason for so many mouthshut reviews clicked me – they were all fake and bought reviews! And that’s why they all said good about the company.

The point being
This ofcourse is a small example of how simple checks on a business could help. But my point is that even in such a small transaction, it was helpful. Then why miss it in a bigger transaction? I have often come across suspicious businesses that could be discovered by an apparent look. The problem is that we don’t look at all.

Just start with a basic process – Look at registration details, financial highlights, directors and connected companies. This could go a long way to save trouble in the future.

The vendor onboarding policies and thoroughness of due-diligence depends on several factors like the size of your organisation, criticalness of a vendor to your business, size and nature of transaction, etc. However, these are five essential checks you should always perform on a vendor to avoid trouble later.

1. KYC documents: Verify the GSTIN, PAN and company incorporation certificate of the vendor. Verify if supplier has any other specific licenses, registrations or certificates required. E.g FSSAI certificate in food and beverage industry.
2. Revenue from operations: Check the operating revenues of the vendor for last 3-5 years. See if they are going up or down. If they are going down, what are the reasons? Could they be losing business because of unreliability? Is it a temporary situation?
3. Registration details: Verify address, CIN, incorporation date, status, and directors’ address as provided by vendor against a third party website.
4. Other business interests: Check if the vendor has other conflicting businesses or has many directorships in other companies. Multiple business interests means less focus on one business. You may not want to tie up with such a vendor.
5. Your organisation’s blacklist: Many organisations create their own negative list or blacklist of companies to not work with. Check that your new vendor is not in that list or any of its related-party is not in that list. Also, do check that the vendor is not in RBI, SEBI or MCA defaulter lists.

These 5 essential checks could form the basis of your vendor onboarding process. You could then evolve the process gradually as your business needs increase.

In continuation with our financial statement analysis series, we looked at the ratio analysis and two key ratios used for analysis in the last article. In this article we explore the other two key ratios that are used, viz., activity ratio and the solvency ratio.

Activity Ratio

These ratios indicate the relative efficiency of the company based on use of its assets present on balance sheet, and are frequent to determine and quantify whether the company’s management’s efforts are enough in generating revenues and cash.

This is the fundamental of any company; trying to turn the produced goods of into and revenue, so the investors can get the understanding of production efficiency by using ratios like asset-turnover ratio and inventory turnover ratio.

These ratios are most useful when the management of a company needs to compare the company with its competitors or the whole industry to measure whether the company’s functioning in a favorable manner or not.

Some of the ratios are:

1. Inventory Turnover Ratio: Typically, it details how much inventory is sold over a period of time. Usually, a higher ratio is preferred and indicates that more sales are being generated by using less amount of inventory. However, sometimes a very high inventory ratio could result in lost sales. This is always important to compare this ratio with the industry benchmark to assess the successful management of inventory.

Formula: Inventory Turnover Ratio= Sales/Inventory

2. Receivables Turnover Ratio: It indicates the efficiency of the company to manage the credit it issues to customers in the form of collection of cash from customers buying goods or services on credit. It creates the relationship between the average debtors and the credit sales made over a period of time.

Formula: Receivables Turnover Ratio= Net Credit Sales/Average Accounts receivables

3. Average Collection Period: It indicates the approximate amount of time that it takes in collection of credit it issued to customers. It also indicates the ability of management to collect and sustain the inflow of cash in the company.

Formula: Average Collection Period= (Days X Average amount of accounts receivables)/Net credit sales

4. Average Payment Period: It again helps to indicate the short-term liquidity of the company and used to know in how many days does the company pay its outstanding dues to suppliers. It calculated from dividing net credit purchase over a period by average payable amount of suppliers over that same period.

Formula: Average Payment Period= Total net credit purchases/Average account payable

5. Asset Turnover Ratio: It is a ratio used to measure the operating effectiveness and efficiency of the company to generate net sales from total amount of assets held by the firm. Higher asset turnover ratio is better for the company.

Total Assets: It includes fixed assets (net of depreciation) and current assets

Formula: Fixed Asset Turnover Ratio= Net Sales/Total Asset

6. Working Capital Turnover Ratio: It indicates the efficiency of management of company to generate the net revenue by using the invested working capital in the company. It could be used by analysts to compare the data within the company to know about the trend or with the industry benchmark to know improve or deteriorate in ratio.

Formula: Working Capital Turnover Ratio= Sale/Working Capital

Where working capital is difference between current assets and current liabilities.

7. Fixed Asset Turnover Ratio: It is a ratio used to measure the operating effectiveness and efficiency of the company to generate net sales from fixed asset investment, namely property, plant and equipment, net of depreciation. Higher fixed asset turnover ratio is better for the company.

Formula: Fixed Asset Turnover Ratio= Net Sales/Net Fixed Assets

Solvency Ratio

Solvency refers to the ability of the company to pay its long-term debt on time. It indicates the company’s financial strength and sufficient flow of cash to meet paying off its debt and other obligation. It relates the net income after tax but before debt with all the liabilities of the company. However, this ratio is an extensive measure of solvency because it emphasis on the calculation of cash flow rather than on net income by including depreciation to assess the companies capacity to stay solvent.

Evaluating cash flow rather than net income is a better thing because it may happen that the companies incurring large amount of depreciation for their assets but have low level of actual profitability. On the other hand, measuring the company’s solvency by considering all its liabilities rather than debt alone, since it may be possible that the company have low debt but poor cash management of its account payable.

Using these ratios, a company should be compared with its competitors in the same industry for a better result.

Some ratios are given below:

1. Debt-Equity Ratio: It indicates the level of leverage of the company, calculated by the dividing company’s total debt by its shareholder’s fund (equity capital + reserve and surplus). It indicates that how much of the company’s total assets are financed by debt in comparison with the amount of shareholder’s equity.

Formula: Debt Equity Ratio= Total Debts/Shareholder’s Equity

2. Time Interest Earned Ratio: It indicates the coverage of debt interest obligation from the company’s earnings before interest and tax. It also shows the company’s ability to generate and sustain sufficient pretax and interest earnings. The downfall of ratio may result in bankruptcy. It is also known as interest coverage ratio.

Formula: Time Interest Earned Ratio= Earnings before interest and tax/Total Debt

3. Proprietary Ratio: It determines the realization percentage of common stockholders in assets of the company in the event of liquidation. It indicates the security about the common stockholder’s equity.

Stockholder’s Equity: Sum of common stock, additional paid in capital and retained earnings

Formula: Return on Common Stockholders Equity Ratio= Total Stockholder’s Equity/Total Assets

4. Fixed Asset to Equity Ratio: It indicates the amount of equity invested by the company in fixed assets. It could also be seen as the solvency of shareholder’s funds against fixed assets. This ratio could help or hurt the company’s efforts to attract additional investors. This ratio is relatively more frequent is use, since every investors do have more concerned about the principal amount of investment made by him rather than with the earnings on his investment.

Net Fixed Assets: Fixed assets net of depreciation (Gross Value – Dep. = Net Block)

Formula: Fixed Asset to Equity Ratio= Net Fixed Assets/Shareholder’s Equity

5. Current Asset to Equity Ratio: It indicates the amount of shareholder’s equity that’s invested in current assets.

Formula: Current Asset to Equity Ratio= Current Assets/Shareholder’s Equity

6. Capital Gearing Ratio: It stages the degree to which a company’s activities are funded by the shareholder’s and how much through borrower’s fund. It also helps to quantify the degree of financial leverage in the company. A high leverage could be more troubling to make downside effect on the business cycle of the company because the company has to pay its interest liabilities irrespective of low revenues, but if done right, it could leverage profitability to higher than before.

Formula: Capital Gearing Ratio= (Long term debt + Short term debt + Bank overdraft)/Shareholder’s Equity

Conclusion                                                                                                                                           

• Ratio analysis is the most common and popular tool used for comparing and analyzing a company’s performance to a peer or with its own performance from an earlier period. It allows analysts and investors to make a better understanding of a company’s working, and take better-judged decisions. It not only helps to analyze each corner of financial statements but also judge the financial trend of a company in the coming years.
• Having said that, it is more difficult to find an adequate standard for comparison; to monitor any improvement or deterioration in the ratio in the next period.
• If there is sustainable difference between companies by size, style of management and service or product, comparison will be more difficult.
• There is no definite process set for performing ratio analysis, an analyst should perform it by his/her own knowledge and expertise; therefore, we can say, it should not be a definite answer of performance of enterprise.

For Annual Reports, Balance Sheets, Profit & Loss, Company Research Reports, directors and other financial information on ALL Indian Companies, head over to www.tofler.in – Business Research Platform.

Author– Harsh is a CA final aspirant with a Bachelor degree in Law. Nothing makes Harsh happier than writing on his field that can enhance his readers’ domain know-how. He loves to play with numbers and learn new things.

Editor –  Anchal, co-founder at Tofler, is a CA, CS and has more than 5 years experience in company analysis. She likes to explore and track companies, their performance and senior management.

Ratio analysis is one of the most widely used technique for analyzing financial statements. In this article we explore what ratio analysis is, its categories and two of the key ratios to look at- liquidity and profitability.

Ratio Analysis

Ratio analysis is a technical and quantitative analysis of a company’s financial statements that is used by several investors to obtain key indications about performance of the firm in several areas.

It is a tool that’s used for making comparisons across the companies within one industry or across the sector for the same company. The financial decisions of the investor are highly affected by these ratios. It facilitates the comparison of different sized firms, too. These can also be used in trend analysis to check the areas where the performance has improved or deteriorated over time.

Liquidity ratio                                                                                                       

It is a tool to measure the adequacy of current assets, and helps to evaluate the ability of businesses to pay its short-term debt. These ratios measure the short-term solvency of the business such as maintaining sufficient current and liquid assets to pay its short-term debts is considered to have a strong solvency.

Financial Institutions and suppliers of goods or services (on credit) are often checking these ratios to estimate the solvency of the business, to check that the assets of the business are sufficient to pay its current obligations. Commercial banks and supplier might not be willing to offer loans to businesses with weak short-term solvency.

Liquid ratios are not true measures of the liquidity of the business because they only tell about the quantity of the liquid assets and not about its quality. Therefore, these should be used with care, and for a better interpretation and analysis, these should be used in combination with the activity ratios (later discussed).

Important liquid ratios are given below:

1. Current Ratio: Also known as working capital ratio, this ratio is based on items from balance sheet and it tries to compare the current and liquid assets (cash, cash equivalent, debtor) with the current obligations that are payable within a short period of time, usually a year. This ratio tells about the short-term solvency, ability to meet the current obligations of the business.

Formula: Current Ratio= Current assets/Current liabilities

2. Quick Ratio: It is one of the most important ratios to test the ability of business to meet its short-term obligations on time. It shows a relationship between the liquid asset and current liabilities present in the business.

Liquid assets: Total Current assets minus inventories and prepaid expenses.

Formula: Quick Ratio =  Liquid assets/Current liabilities

3. Absolute Liquid Ratio: This ratio only considers the cash and cash equivalents for measuring the ultra- short-term liquidity of the business.

Absolute liquid Asset: Liquid assets minus accounts receivable (including bills receivables).

Formula: Absolute liquid ratio= Absolute liquid assets/Current liabilities

4. Current Cash Debt Coverage Ratio: This ratio shows a relationship between net operating cash generated over a particular period to average current liabilities (opening current liabilities + closing current liabilities)/2

It indicates the ability of the business unit to pay its current liabilities using cash generated from day-to-day business operations.

Formula: Current cash debt coverage ratio= Net cash provided by operating activities/Average current liabilities

Profitability Ratio                                                                                               

Profit is the key objective of all businesses. To survive and thrive, all businesses need a consistent and sufficient amount of profit over a period of time with improvements moving ahead.

These ratios help in determining the efficiency of business to use its resources in generating profit and increasing shareholder value. Almost all the parties related to a business use profitability ratios for valuation purposes and understanding the success or failure of business operations against its competitors.

A strong profitability trend ensures high dividend income and appreciation in the value of common stock holders. Management needs to ensure sufficient profit is generated to pay the dividend or to reinvest a portion in the business to increase the work capacity and improve the overall financial prospects of the business in the near future. Strong profitability also ensures the creditors and outside provider of financing safety regarding their fund and income as well as smoother running of the business.

Important profitable ratios are given below:

1. Net Profit ratio: It is a ratio between net profit after tax and net sales (denominator). The purpose of this ratio is to evaluate the profits from its primary operating activities. Higher net profit ratio indicates the efficient management of the affairs of business with better control on cost.

Net profit: Gross profit minus non-operating revenues and expenses (or Total revenue less total expense during the period    

Formula: Net profit ratio= Net profit after tax/Net sales

2. Gross Profit Ratio: It is also known as ‘Gross Margin’ ratio. This ratio is used to assess the company’s financial health by diagnose the money left after accounting adjustments of Cost of Goods Sold (COGS), the core expenditure for day to day production. It disclosed the capacity of company to pay additional expenses and future savings.

Formula: Gross Profit ratio= (Revenue – COGS)/Revenue

3. Price Earnings Ratio: This is the most useful and frequently used ratio for investors, to judge the share price of the company – whether it is overvalued or undervalued in the market. This ratio enables the investor to know about his earning on per rupee of investment in the share price of a company.

Formula: Price Earnings Ratio= Market Price/Earnings per share

4. Operating Ratio: This ratio defines the operating efficiency of the management of the company; managing to reduce the expenses and generate profit of the company while revenues are decreasing. The smaller ratio is better for the company. Investors should be aware that this ratio does not include finance cost.

Formula: Operating Ratio= Operating Expense/Net Sales

5. Expense Ratio: This ratio defines the measure of costs for an investment company to operate a mutual fund. An asset management company is concerned with the operating cost and other cost incidental thereto of a mutual fund, those are taken out of a fund’s asset. It is also known as ‘management expense ratio’.

Formula: Expense ratio= Administrative and Operating Expenses/Average of Fund’s Asset

6. Dividend Yield Ratio: It comprises the per share dividend income for an investor. By using this metric, investor can analyze the return on his investment in form of dividend income compared to price paid by him/her in the market. This could be a better tool to compare two different investments on the basis of their dividend generating capacity, like equity or mutual fund.

Formula: Dividend Yield= Annual Dividend Per Share/Market  Price per Share

7. Dividend Payout Ratio: It presents the percentage of net income a company is paying in the form of dividend to its shareholders. The ratio also describes the financial strength of the company and prospects for maintaining or improving its dividend payout in future. High payout ratio may not be a better indication about a company, due to the fact that the company is using less percentage of net income to reinvest in company growth. A company may decide to retain more in order to invest for business expansion in the coming period

Formula: Dividend Payout Ratio= Annual Dividend paid/Earnings per Share

8. Return on Capital Employed Ratio: This ratio indicates the operating effectiveness of the company and how efficient the company is in using its capital employed in order to generate the earnings and increase the value of shareholders’ stake. Higher the ratio, better it is for the company. It is a popular ratio used to compare two different companies under the same industry or performance of the same company for two different periods to analyze the increase or decrease in return.

Earnings before Interest and Tax: Revenue less COGS and operating expenses

Capital Employed: Total Assets less Current Liabilities

Formula: Return on Capital Employed= Earnings before interest and tax/Capital Employed

9. Earnings Per Share: It is a portion of company’s profit after dividend allocated to equity shares: allocated to the outstanding share of common stock per share. It is more accurate to use weighted average number of shares outstanding over the term, because the number of shares outstanding can different over time. It also includes ‘Diluted EPS’. Diluted EPS expands on the basic EPS by considering the expected conversions of shares of convertible or warrants outstanding in the outstanding number of shares. EPS is also the most important metric to determine the share price, by used in price-earnings ratio.

Formula: EPS= Earnings attributable to common stock/Weighted average number of outstanding common share

10. Return on Equity Ratio: This is another tool to quantify the efficiency of company in generating profits, except it only considers the equity portion of capital invested by the shareholders. It could also be used in comparison between two companies having same size of equity capital on the basis of highest ROE.

Formula: ROE= Net Income/Shareholder’s Equity

11. Return on Common Stockholders Equity Ratio: It determines the realization percentage of earnings generated by the company for common stockholders.

Stockholder’s Equity: Sum of common stock, additional paid in capital and retained earnings

Formula: Return on Common Stockholders Equity Ratio= (Net Income – Preferential dividend)/Average common stockholders’ equity

In the next part, we will look at the two other important ratios- activity and solvency.

For Annual Reports, Balance Sheets, Profit & Loss, Company Research Reports, directors and other financial information on ALL Indian Companies, head over to www.tofler.in – Business Research Platform.

Author– Harsh is a CA final aspirant with a Bachelor degree in Law. Nothing makes Harsh happier than writing on his field that can enhance his readers’ domain know-how. He loves to play with numbers and learn new things.

Editor –  Anchal, co-founder at Tofler, is a CA, CS and has more than 5 years experience in company analysis. She likes to explore and track companies, their performance and senior management.

Given the recent brouhaha around the mysterious large donors of the Aam Aadmi Party (AAP), we decided to put the resources available at Tofler to use for finding out more about these companies.

The issue is the appearance of four large donations of INR 50 lacs each on 5th April, 2014 on the AAP website. [inlinetweet prefix=”” tweeter=”twstofler” suffix=”Tweet This”]AAP has apparently stated that to prevent the presence of “black money” in the financing of AAP, all donations of INR 10 lacs and above are scrutinized by an internal committee. It is now alleged that AAP did not conduct sufficient diligence on these large donations. Now, however, even you can easily conduct due-diligence on these companies using the resources of Tofler.[/inlinetweet]

The donations in question were received by AAP under the following details:

A quick look at the list of directors of each of these companies would show that they effectively belong to the same set of people. The list of directors of each is as follows:

All these individuals are residents of Delhi, with Hem Prakash Sharma (age 26), Mukesh Kumar (age 47), Yogesh Kumar (age 28)  being residents of Ganga Vihar, Delhi, Ajay Kumar Upadhyay (age 33) a resident of Shahkarpur, Delhi, Deepak Aggarwal (age 47) a resident of Rohini, Delhi and Mohit (age 22) a resident of Mayur Vihar, Delhi.

Turning to the affairs of the companies themselves. A quick summary of their auditors and financials is as follows:

It is worth noting that all companies have the same auditor, viz. S. Bansal and Associates (Sudhanshu Bansal). Further, none of these companies seem to have any operating business to speak of (as evidenced by their profits and nature of assets). What is even more interesting is that none of these companies have filed their required annual returns with the Registrar of Companies for the year 2013-14. These documents are normally required to be filed by the end of October (in this case, 31st October, 2014).

An even more detailed due-diligence on these companies is possible using the reports and information products provided by Tofler. One can obtain copies of the official documents filed by these companies with the Registrar of Companies for just INR 100. One can even get financial overview reports for a nominal price.

The Tofler reports that are the source of information of the content above are available here:

Goldmine Buildcon Private Limited
Skyline Metal and Alloys Private Limited
Sunvision Agencies Private Limited
Infolance Software Solutions Limited

Links to some of the official documents referred to for the piece above:
Goldmine Buildcon – Balance Sheet for 31st March, 2013
Infolance Software Solutions – Balance Sheet for 31st March, 2013
Skyline Metal and Alloys – Balance Sheet for 31st March 2013
Sunvision Agencies – Balance Sheet for 31st March 2013
Sunvision Agencies – Director’s Report for 31st March 2013

Are you doing business with a Small or Medium sized company? Are you a vendor, customer or a competitor of a Small or Medium Enterprise (SME).  Are you planning to enter into a Joint venture with it? How do you study small and medium sized companies? What documents should be reviewed?

Although, the information requirements depends on the purpose of study – from the point of view of vendor, customer, investor, joint venture, competitor etc, but the following are a few common requirements:

1. Balance Sheet – Reviewing the past performance of the company for last 3-4 years is essential to check the financial health of the company. Does the company have enough assets to make your payments. Does it generate enough cash? Is the company deep in debt? What are its its liabilities? Does the company have huge outstanding creditors or it pays them off regularly?
2. Profit and Loss account – This document also helps in reviewing the past performance of the company. What is the scale of the company? What are its revenues? What are its profits? Does it make enough profits? Is it in losses? For how long can it sustain losses?
3.  Learning about Directors – It is equally essential to know who is running the company? Value investors say that the actions of a company depend on its top management. It is essential to know whether directors enjoy a good market reputation. What do people say and think about them? Are these directors running any other company also? How is that company performing? What is the director’s salary as a percentage of Company’s profits?
4. Exploring Network of the Company – Explore the network of the company and discover who is the company associated with?
5. Funds raised by company in the past – When and at what valuations has the company raised in the past? You would be particularly interested in this information if you are planning to invest in the company. You can also look at the special resolutions passed by the company in the past to understand its decision making process.

There are many more documents that can be helpful to you depending on your purpose. You can use Tofler to find financials and all the documents filed by the company with the Government. Tofler maintains database of all 14 lacs companies in India. You can also use company value reports provided by Tofler that will summarise important information (bank loan, funds raised in past and valuations, previous directors, auditors, balance sheet, profit and loss, and more) in one report. It will  also analyse the financials of the company and its past performance for you. These reports contain financial ratios to analyse liquidity, leverage, efficiency etc. Also explore a company’s network, its directors and their other directorships at www.tofler.in.

Explore the Company network visually at www.tofler.in.

If you were to conduct a Due Diligence of a company/business, what aspects and areas would you cover? How will you start with it? Yes, I know, what you are thinking – What is the purpose of that Due Diligence? What does that company do? How detailed does it have to be? Well, these are the right questions to be asked.

But for the sake of understanding, which areas would be covered on a broad level? To start with, here is a brief list of the areas to be analysed and the basic questions that should be answered:

1. Financial Due Diligence: Company’s past financial performance is reviewed. Its future performance is anticipated based on several factors and assumptions. Working capital requirements, cash positions, loans, assets value, expense requirements are studied. Basic questions answered – What is the value of the company? Are the financial projections realistic? What are the future financial needs of the company?
2. Legal Due Diligence: The ownership structure of the company is studied. All contracts entered into by the company with employees (including ESOPs), lenders, lessors, lessees and others are reviewed. Title deeds of assets like land, IPR (trademarks, patents etc) are reviewed. Basic questions answered – Are there any hidden liabilities? Does the company own valid title to its assets? Does the company comply with all applicable laws (including tax, company and labour laws)? How much penalty could arise due to any non compliance? Any pending legal suits and their potential settlement claims?
3. Operational Due Diligence: The processes associated to the operation of the company are studied. Documents defining business relationships with suppliers, customers, distributors are studied. Basic questions answered – Are internal control procedures of the company strong enough? Is the supplier, distributor and customer base of the company loyal? What are the distribution channels of the company?
4. Strategic Due Diligence: This involves studying the business model, strategic plan and thinking process of the Company.  Basic questions answered – What is the ‘strategy’ of the company? What is the future vision of the company? How does the leadership see itself placed in the industry? Why do they think the company is valuable?
5. Personal Due Diligence: Org Chart of the management, a Bio/Resume for each executive and critical employee is studied. Their compensation contracts are reviewed. Basic questions answered – Are they paid significantly above the reasonable compensation? Are there any undocumented oral agreements on future perks with these employees? Is any of these executive unhappy with the deal?

These are the critical areas which should be carefully studied and reviewed as part of a Due Diligence activity.

Tofler’s company reports can be of help here by providing information on:

• Financial performance for last years (also presented in charts for easy analysis)
• Performance, leverage, working capital and liquidity ratios
• Current directors, key employees and ex-directors
• Other directorships of the company’s directors. This can help you assess the focus of the directors. In addition, the performance of other companies can be a good clue to the effectiveness of these directors.
• and more.