Strategies for retail investors in a bad market

• In a bad market, remember that cash is king
• In such markets, do not invest all your cash at one go as one will get numerous chances.
• Also, do not buy and hold until the trend reverses.
• The first phase of buying will always start in large-caps rather than small-caps.

So, what are the different types of ratios that investors can use?
Price to book ratio:
Book value is the accounting value of company’s assets minus all liabilities. If the market price is lower than the book value, the company is estimated to be available at a real bargain. For certain sectors the book value is always high. For example, heavy machinery in textile industry as machineries actually depreciates faster. One should also be careful while using this ratio as accounting practices can artificially lead to a higher book value. Assets are depreciated over time, but the fair market value can be much lower.
Market capitalization to cash ratio:
It is calculated as the market capitalization of shares divided by the free cash flow of the firm, or FCFF.
FCFF= operating cash flow less tax, interest and capital spending for business.
= NOPLAT +Depreciation- Increase/ (decrease) in working cap- CAPEX+ Increase/ (decrease) in deferred Taxes
This is a ‘point-in-time’ ratio and is available only after a delay of at least two quarters. But the real issue is that the business scenarios change dynamically. Also, FCFF is only estimation.
It cannot be calculated correctly by outsiders.

So, what should investors do?
A consolidation phase is a good time to invest systematically. Value strategies may have a longer pay-off period, but in that patience is key. Also, one should remember that no indicator works in isolation.

Other things to keep in mind are:

• Return on tangible assets
• Look for companies which have got strong cash flows.
• Very small debt piles
• High interest coverage ratio
• Their Business model:
• Positive Operating cash flows
• Relative valuations
• Debt-Equity ratio:
• High Interest coverage ratio to service the debt
• Price-to-book value
• Return on capital employed (RoCE) & Return on Net Worth (RoNW), which should be higher than prevailing Interest rates.
• Dividend history
• Company management