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Track corporate performance to evaluate investments

Equity investors keep a close watch on the impact of prevailing conditions on companies and this is one reason why certain developments impact markets across the world.

business Updated: Oct 08, 2008 21:48 IST

Equity investors keep a close watch on the impact of prevailing conditions on companies and this is one reason why certain developments impact markets across the world.

With turbulence in the US and Europe, investors are keeping a keen watch on the manner in which it could impact the performance of Indian companies. In such a situation it is essential to understand the relationship between market movements and companies.

Overall growth
The major concern of most analysts is the overall growth witnessed in the economy. This is the starting point for other activities to follow. If growth is strong, then there is also expectation that companies will perform well and the impact of this will be on stock markets.

There will always be situations where a particular sector is showing a different kind of performance from the overall situation and hence this has to be taken into consideration. There can be a reverse situation too when the expectation of growth comes down and the impact will be witnessed accordingly as analysts revise their expectations from the companies along with price targets.

Impact on company performance
As companies across the country continue their operation, there will be an impact on their performance.

If there are tough conditions in the form of a slowdown in growth then it is to be expected that there will be an impact on the way companies’ financials shape up. This can be on account of slowdown in demand for products or that there is an increase in the cost of operations leading to an impact on the margins earned by a company. Once this is impacted, valuation of the company has to be revised. This can be either upwards or downwards depending on the situation faced by the company.

Price changes
The price changes seen in the market flow from all these factors. In this respect one has to take a long-term view, because short-term factors may cause some price movement but it gets smoothened out over a period of time. This will see the entity move towards a certain valuation and the prices will reflect this accordingly. This is vital to arrive at future expectations from the company.