Stock Market Tips 8

The Company’s environment

Companies are inextricably linked to their industrial, commercial and economic environments. They can't hope to isolate themselves from these environmental influences. In an adverse environment, even the most profitable and well managed companies find the going tough, whereas a favorable environment usually gives a boost to even the most sluggish and mismanaged companies. Therefore, if you want to accurately assess a company's business prospects you must take its environment into account.

Like every other free market economy, country's economy is subject to cyclical swings between periods of boom, and recession. Since the Indian economy is dominated by agriculture, a steep rise in agricultural production invariably leads to an industrial boom, whereas a fall in agricultural production is usually followed by a general all round recession in the economy. Agricultural production is, in turn, heavily dependent upon the success or failure of the monsoon. As an investor, therefore, you should not only keep a tab on agricultural production figures but also on rainfall and monsoon forecasts. This will enable you to not only anticipate periods of boom and recession, but also to profit from them through timely and appropriate investments.

The sales and profits of most companies rise during a boom and fall during a recession. It is only occasionally that one comes across a company whose performance moves against the general trend. Therefore, you should try to find out whether the company you are interested in is one which moves with the trend or against it. Also, find out the extent to which the company is influenced by a boom or recession in the economy.

Inflation is a persistent and nation wide problem which affects the working and performance of all companies. However, the nature and extent of its impact on each company varies considerably. Some companies are adversely affected by it, whereas others are not only able to effectively cope with inflation, but actually thrive on it. For example, companies manufacturing mopeds have actually grown and prospered as a direct result of inflation. This is because an increase in the cost of living, particularly the cost of transport, forces many to switch over from cars, scooters and motorcycles to mopeds. Inflation usually pushes up the costs of production. Some companies can pass on this increase in costs to consumers while others cannot. The former benefit from inflation, while the latter are adversely affected by it. Inflation redistributes purchasing power within the economy. This leads to a contraction in demand for some products and an expansion in the demand for others. Some companies benefit from this, others don't. These are some of the obvious ways in which inflation affects the working and performance of companies.

The performance of the railways, power plants and the coal, oil and steel industries are major environmental factors, which have a widespread impact upon the performance of all companies. As an investor, therefore, you should try and determine the extent to which a company that you are interested in is likely to be affected by shortages in the availability of coal, power, railway wagons, oil and steel. In addition, what impact would a rise in railway freight rates, power tariffs, or a rise in the price of steel, coal and oil have on the company's profits?

Corporate performances are also extremely sensitive to changes in interest rates, excise and customs duties, depreciation rates, import export policies and the exchange rate. of the dollar vis a vis other major international currencies. It would be useful for you to find out to what extent the performance of the company you want to invest in is likely to be influenced by these factors. Historically, low interest rates have been known to benefit companies operating in the transport, construction and agricultural equipment industries Leasing and hire purchase companies also benefit immensely from, falling interest rates.