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Investment in Foreign Stock: A Cash Flow Analysis
內容大綱
The case discusses the dilemma faced by Archit Shah, a practicing Chartered Accountant (CA) and portfolio manager based in Ahmedabad, India, for investment in foreign stocks to diversify the existing portfolio of his clients. The decision to invest was pertinent and urgent as few of his clients were reducing their funds due to stagnant growth of existing securities in the portfolio. He had heard about the benefits of investing in foreign markets from experts in different financial conferences as well as from his fellow friends in the field. To start safe, he decided to invest in FANMAG stock and do a detailed financial analysis. It was his first endeavour in a foreign stock, and he did not want to risk his clients' money. He did not restrict his analysis to P/L and balance sheet ratios and decided to first analyse the past free cash flows (FCFs) to understand the actual performance of the companies. While past performance cannot be the decision factor, he also decided to refer valuation as per discounted cash flow (DCF) model to put an end to his confusion. Portfolio or fund managers use FCF as one of the most important indicators for valuation as per DCF model to evaluate the true performance of a company. Market ratios like P/E ratio help to track the earnings and investor's perception while FCFs help to understand the actual cash available for shareholders. So, to get a true picture of FANMAG stock's performance, Shah decided to analyse it through various parameters like quality of earnings ratio, FCFs, and valuation ratios for a period of 5 years from 2016 to 2020. Additionally, the intrinsic value as per DCF model (valuation approach) was referred to finalize the investment decision. Thus, the case deals with the challenges faced by CA Shah for investment decisions by assessing the earnings quality and the cash flow-based valuation ratios.