Evergrande
I’d never bothered to run Evergrande through our various chart packs.
But on high profile failures, it’s often useful to do so, even if you know the general story pretty well.
This stood out, for example. What sort of multiple do you put on a stock with such a dismal track record of “one-offs”. It’s pretty clear here that the stated PE would need a large discount to reflect the lower “true” earnings profile.
As did this…almost no cashflow generated. So the earnings are almost certainly not real.
Lack of cash flow tends to result in this…an insurmountable and growing debt pile..
…which looked worrisome on a range of frames.
All the other graphs are obvious “that looks bad”. Margins can mask all manner of sins, but perhaps (with the negative hat on) you’d note that they appear highly cyclical, with a downward trend. So you’d aim to be careful about what sort of multiple you’d put on it, at the least.
Like all signals, you’d want to understand what the drivers of working capital are, whether those sorts of patterns are expected for the stock / sector, what their proportionalities should be, if it is just a crutch for otherwise non-existent cashflows…
…which we know was ultimately the case.
So, could you tell, ahead of time, that there’d likely be problems? Yep, based on maybe 90 seconds of analysis, by dusting off the P&L, BS and SoCFs.
There’s nothing particularly clever or deep about such analysis. And it is distinct from alpha. As someone smart once said “avoid the blow-ups, and you’ll probably make money”. It doesn’t guarantee outperformance (nothing does), but it is a start.
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