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Learn Financial Freedom Step by Step

High Market Value But Low Financial Health of Company



 If you are long term investor, you may see high market value of company but low financial health. Today, I will explain this and how it will affect your investment decision in share market.

High Market Value of a Share 

Suppose, you see, you buy the company share of Rs. 100 before 5 years and today, you are seeing that its value is Rs. 200. It looks great. O my God, you have given me double within 5 years. 

Now, next question

Will you buy more its share?

Because this trend may repeat

If you do not learn the second part, this deal is ok.

Company's share value is increasing the market and I got 100% return in 5 years and every year I am earning 20% but stop few seconds and focus

1. Is not over value what its annual report is showing 

Means actual price of company should be calculated on the basis of financial statement's results and position.

Financial Health of Company

1. If company's profit is decreasing or its loss is increasing from previous year, it is called low financial health

2. If company's outside and long term liabilities including long term borrowing are increasing from previous year and long term asset is increasing in less properation, it means it has low financial health. 

3. If company's current liabilities are more than current assets, it is the sign of financial health weakness.

4. If total outside liabilities more than total assets, it is negative net worth, it is also weakness of financial health.

5. If board of director's have not solid plan to cover from it, it is also big financial health weakness.

Now

As per me, you should wait for positive actions of board of directors and management team who taken strong action and see next annual report balance sheet and income statements, 

is it improve and then buy more share.

Same time, you can search other good financial health company who's market value of share is less than its financial strength. So, in long term, it will give power.

What Happens if I Buy Overvalued Shares

If its creditors thinks company in danger, they can captured its assets and unsecured creditors also will claim. Market value will crash and come to lowest point and if company go to liquidation, you will not find the portion from its asset and it may hope whose share has become double, you may receive only 10% of your principal investment of your share from court. So, be careful. 

Why People Buy at High Value When Company's Financial Health Weak

1. Ignorance of reading income statement and balance sheet, they can see long term trending of growing market price and assume next 5 year's its price will increase

2. Over confident, company is working and price is increasing, it will increase more in the market

3. Not selling by existing shareholder. With this, supply stops but demand increases and which want to sell, he bids more market price, so, market price will increase


Read Also 

  1. How to Check Financial Health of Company?
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