Love to invest in small cap companies? Read this before you invest!!

Every investor looks for a company that can become multibagger  in coming years.So investor starts searching for those very small companies that can become big like Infosys / HDFC bank.

But is this so easy?

There are people who will invest in companies having market cap less than 100 crores and hope that luck goes in their favor!!. Believe me,Investing in micro cap companies is the biggest risk one is taking with his/her hard earned money.A small company can have fluctuating earnings and profit growth.Competitors can finish them and are vulnerable to government policy changes. Moreover in some cases they are used as a tool by fraudsters to cheat small investors as they can be easily lured for big returns in future.

Consider an example of Bartronics.It used to make bar codes and there was nothing special in their business that would have made them command  30% plus EDITDA margins !! .It was just bar codes they were selling.

Promotor shareholding kept on decreasing year on year from 49% to 12 %.Also,If their balance sheet is analysed properly the money which they needed to collect from debtors was more than the total sales shown.Share price soon followed the fundamentals and dropped to 8 Rs from 320 Rs

Another company that cheated its investors was Dr Datson labs 

A few months  ago,two national exchanges were suspending the shares of Dr Datson's Lab, a little known pharma company, on 22nd May. The company’s promoters had pledged their entire shareholding which was invoked by the lenders leaving it orphaned. Other lenders had moved court and the official liquidator had taken possession of the company and its registered office on 30 April 2015

In fact, Dr Datson’s Labs seems to have been just a large money laundering operation. And, yet, like the dubious Satyam Computers, it won a series of awards for corporate governance, innovation, transformation and leadership all the way until its eventual collapse in 2015. Here again promotor shareholding kept on decreasing year after year.Why would a promotor who knows most about his  business will sell shares to someone else? Of course it will be done by those promoters  who know that there is no future of their company. Dr Datsun labs changed its name multiple times during the course of its existence.Share price too dropped from 218 Rs to 2 Rs and later suspended.

It makes sense to do proper research on balance sheet and management credentials before investing in such companies. Lots of listed Indian companies are just fooling their investors as there is no way they can make money for their shareholders.

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