Loss-making companies - What should you do?
What should you do when your invested companies start reporting losses? Should you exit or wait for a turnaround? First up all we need to find out why company is posting losses? And then decide further course of action.
Why are company reported losses in the mid of 2011? The reasons are high commodity prices along with rising interest rates have started affecting the corporate performance.
Generally it is observed that the stock price starts coming down before the company actually reports the losses.
Does this mean that Investor should hold on to loss-making companies and use the current price correction to your advantage by buying more and thus reducing the average cost? Not really. Investor decision should be based on the fundamentals. There is no point in holding on to a stock (or adding more) if the fundamentals don't justify it.
In other words, Investor has to analyse each company and identify why it has been making losses. Hold on to a stock only if the business model is good, the top line is growing and the current margin pressure is due to temporary factors.
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The following are few temporary reasons -
a) If the company profits are getting hurt due to rising interest rates and or commodity prices.
For example - Reserve Bank of India (RBI) hiked interest rate 13 times since early 2010. After 13 months, first time, RBI has cut the rates in Jan 2012.
b) International or domestic political issues
c) Sector issues like rise in tax rates or seasonal slow down.
d) Slow down in demand in any particular sector.
To conclude, stay invested in company if the reasons are temporary but in fact the investor can average the stocks at lower price if companies business is standing on strong fundamentals.
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