No.
“A company’s share price is said to reflect the present value of expected future after-tax cash flows.”
Breaking down this statement is crucial for analyzing investment decisions in growing companies to achieve risk-adjusted returns.The phrase “present value” requires us to consider the time value of money. This means that a rupee spent today is more valuable than a rupee earned in the future. The value of money depends upon interest rates and people’s perception of the future.
If the interest rates in the economy are rising then the cost of capital for business will rise. It will become difficult for companies to raise capital and service debt. If people’s perception of the future is gloomy then they will be reluctant to spend. The perception can be affected by any war, economic recession, job loss, etc. If they are not spending then it will be difficult for growth companies to sustain their momentum. All this can have an impact on the way growth companies are valued.
The word “expected” denotes uncertainty and the possibility of chance. The anticipated increase in industry size and the company’s future growth plans carry the risk of uncertainty, and events may not unfold as planned. Market dynamics in a growing industry are constantly evolving, and technological disruption cannot be ruled out. A higher-order book carries execution risks, and heavy capital expenditure contributes to operating expenses, while revenue growth depends on several factors.
The term “after-tax” implies that government policies and budgetary allocations for a particular industry could change. For instance, taking a tough stand, the government imposed the highest GST rate on online gaming activities. Additionally, recent remarks by the Honourable Union Commerce and Industry Minister, expressing concern over the surge in e-commerce transactions, illustrate this point.
Regarding “cash flows”, we must consider a growing company’s continuous need for investment in fixed and working capital from its earned profits. Committing substantial expenses to R&D might not be feasible for a smaller company, and if such an investment is made, its realization remains an uncertain future outcome.
As one market legend famously said, “It is important which stock I buy, but it is more important at what price I buy.” Thus, we cannot ignore the valuation aspect when pursuing growth. The PEG ratio (P/E ratio divided by the growth rate of EPS) or multi-stage discounted cash flow (DCF) methods can be used for valuation.
Often, investors overlook the risk-adjusted required rate of return and valuation parameters when investing in shares of a growing company experiencing upward momentum. However, such pursuit of growth can compromise the margin of safety, increasing the risk of significant losses. Herd bias can influence rationality in investment decisions, leading to potentially costly mistakes.
Investors should always make decisions cautiously, even in a bull market, and follow a disciplined investing approach to avoid sharp price declines and to build a long-term compounding portfolio.
Nifty enjoyed a steady week, gaining 1.15% compared to the previous week to close at 24,823. Nifty remains comfortably above its 20-day moving average and continues to establish a pattern of higher highs and higher lows on the daily chart. A double bottom formation suggests a potential trend reversal, with gradual upward movement underway.
Global markets maintained a positive tone, further boosting sentiment in the domestic market. The daily RSI now holds above the 60 level, strengthening Nifty’s primary uptrend. The key support remains at 24,500, while 25,000 presents an immediate resistance; a breakout above this could push the index toward the 25,150-25,220 range.
The India VIX has declined by 5.90% to 13.55, reflecting reduced volatility. Overall, Nifty is expected to trade sideways with a positive bias.
