Cricket has been a religion for the Indians. The posters of cricketers are treated like the poster of God by the young Indians who are dedicated to become a cricketer in their life. World cricket has seen dramatic changes as cricket progressed in the hearts of cricket lovers. Irrespective of rules, cricket has changed its forms from time to time. 5-day Test cricket which was a true assessment of batsmen’s patience and bowler’s consistency was followed by one-day cricket that display aggressiveness and game-strategy of the team. Later on, 20-overs cricket was introduced that displayed the hasty and quick decision-making qualities of team players. 20-overs cricket received much appreciation from the viewers due to high aggressiveness and ‘Fatafat Match Khatam’ quality.
However, hall of famers of the world cricket still favors ‘Test Cricket’ form as they believe that 5-day form of cricket is the real test of the players but the game was losing popularity due to unavailability of goose-bumps moments, thunder storm batting shots and unplayable yorkers. In order to regain ‘Test Match’ popularity, world cricket decided to organize a ‘World Test Championship’ to regain the interest and we have our finalists with us: Ind vs. NZ for first ever Test championship. People might not believe but Cricket and Equity Markets are similar in nature as gauging a stock that has the potential to perform in long term is a hard nut to crack. A true test of a potential stock is analyzed in long term.
Market participants have seen many stocks in Indian market that have performed well and have shown their true colors over years. It is worth-mentioning that these stocks hold similar traits, remains in an upward journey and every correction is considered as a buying opportunity. Let’s discuss four major traits that make a stock ‘Test Cricket’ performer.
- Consistent Growth Rate in Revenues: First and foremost feature a performing stock carries with it is a consistent growth rate. No matter your growth rate is a little less or more than a standard CAGR, you should be posting growth consistently. History is a universal proof that stocks with stagnancy in growth rate have never performed well. A consistent growth rate in stocks brings good cash flows that provide liquidity to the company to inculcate any expansion plans. It provides a bargaining power on your suppliers and provides you an edge over your rivals. It always helps firms to claim more payables outstanding days.
- Low Debt-Equity Structure: Companies that have performed well continuously usually have low or zero debt in their balance sheet. These companies enjoy higher credit rating from credit rating agencies. These stocks are considered as defensives in times when indices get more volatile. They enjoy premium valuations provided by the market participants. Low-debt company’s shareholders tend to control major decisions without any interference. Companies are not entitled for an interest expenses that kept their operating expenses in control.
- High Operating Margins: Firms that deliver high operating margins tend to perform than its peers. High operating margins signifies higher managerial efficiency of the firm and employees are performing better. Companies that achieve higher operating margins display higher growth in their profitability and return ratios even with a small increase in revenues. Considering the income statement of a firm, a company enjoys high operating margins if it has got inputs at cheaper prices, employees are working with efficiency, unavailability of interest obligations or all.
- Strong Corporate Governance: Corporate Governance is a process to safeguard the interest of the stakeholders in long term. Companies that have strong corporate governance provide transparency in their financial statements, managerial decisions and ownership. The conduct their operations with ethics and values. No whistleblower acts have been witnessed in these kinds of companies. The practice of clean corporate governance restricts government for any interventions. Companies with good corporate governance build long-term relationships with their customers and possess more capability of generating new business.
Companies with the above-mentioned qualities are marathon runners. In most of the cases their correction results in a heavy buying from the market participants. These stocks remain on radar of long term players in the market. They are destined to generate wealth in the long term. There are some times when they feel the heat due to movement of any misleading/wrong information but they bounce back strongly after the clouds of uncertainty faded.