Drop in promoter holding is a lead for deterioration in financials: FiND study

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Promoter ownership data is an important piece of information that can be consumed in risk assessment of corporate borrowers. This is because steep fall in promoter ownership could mean low confidence of promoters in their own company. Moreover, promoter equity dilution may also invite a change in management.

Our hypothesis is that promoter ownership related red flags such as a significant drop in promoter shareholding can act as a leading indicator to the deterioration in the company’s financial performance.

To test this hypothesis, we back-tested business rule output derived from FiND Credit Risk Early Warning System for all listed companies. Our back-testing has shown 298 promoter ownership related red flags for 232 companies for the March 2016 quarter.

As a next step, we have checked if there is any deterioration in the company’s performance captured by our Financial Risk score for these 232 companies over the last 2 years.

We found that: 85% of companies witnessed a deterioration in Financial Risk score in the subsequent quarters.

Ownership data study stats

We highlight 5 such companies whose financial risk score have deteriorated over the past 8-quarters.

Ownership data study

For Euro Ceramics, our EWS application found 2 promoter ownership related red flags for the March 2016 quarter. We have listed these red flags below: 

  1. Shareholding % of promoters reduced by 5-10% compared with the previous quarter
  2. Shareholding % of promoters reduced by more than 10% compared with the previous year

We highlight few financial red flags for Euro Ceramics for the financial year 2016-17 below:

  1. Ratio of cost of goods sold growth over revenue growth is greater than 1.1
  2. Ratio of other income over gross sales compared to previous year has increased by more than 10%
  3. Receivable days compared to previous year has increased by more than 10%
  4. Quick ratio is less than 0.5
  5. Cash from operations is negative
  6. Interest cover compared to previous year has decreased by more than 10%
  7. Interest to debt compared to previous year has increased by more than 10%
  8. Total debt per equity compared to previous year has increased by more than 10%

Our back-testing result validates the use case of promoter ownership data in credit assessment of corporate borrowers. 

FiND Credit Risk EWS captures company-related red-flags based on a variety of business rules. Our intelligent EWS application can help lenders to get an early warning about the deterioration in corporate borrowers’ financial profile ahead of time.

To know more about FiND Credit Risk EWS, email us at find@heckyl.com

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