Money does grow on trees.

Sell Axis Bank! I generally don't start by giving an unsolicited advice. My idea is that you don't give a fish to someone you care for, you teach them fishing. But today this advice was something that seemed necessary. I made a Rs 50 grand profit each on Axis bank and Kovai medical , both of which i bought 3 months back at around 50 grand each( Infact 65 for Axis and 50 for Koavi medical.) Anyways the point is they are trading at such a level which crosses our safety limit. Their P/E is way above 12.5, remember from our previous lesson and they are trading at way above their book value.

Now we begin with our third rule which pertains to growth. The company should be growing at a decent rate. When i talk about growth, it doesn't mean that the company should double its profit in 2 years. It means it should increase its profit at a decent rate and more importantly it should not have a year where it made an overall loss in last 5 years. There may be times when the company makes a profit less than the previous year but this trend should not be followed next year. As my father ,who is also a good investor, says a company's profit will not slide from 100 crore to 10 crore in 1 year. There would have been subtle signs in the Profit and loss of that company in last 5 years.

RULE 3: Invest in a company with a decent growth of around 5-10% and stable earnings and no year with loss in last 5 Years.
The formula: P/E=8.5+2Gwhere G is the growth of the company in percentage, if P/E of the company is less than 8.5+2G, its worth the buy.

So how do you calculate growth.It can be calculated by subtracting the last years net Profit from current years net profit and dividing it by last years net profit and multiplying it by 100. Simple maths! The other parameters that can be used instead of net profit are earning per share and Profit before interest, depreciation and tax (PBIDT).

For eg. A company's net profit in 2013 was 10 crore and in 2014 was 12 crore. so the growth of the company would be {(12-10)/10}x100= 20 percent. calculate similarly for last 5 years and take an average.

Be careful when you use EPS(earning per share) for calculating growth. Sometimes the company issues new shares or buy back old shares which can increase or decrease the number of shares and affect the EPS in subsequent years.

Another thing to be noted is that some times a company gets an exceptional profit. eg winning a case and compensation or makes an exceptional loss due to some unforeseen circumstances. As long as that gain or loss is not too huge, you should ignore that from your calculations.

Now time for the pick of the week.Venus Remedies Ltd. The company's P/E is as low as 3.84, which is good. Right!

its Price/ book value is 0.43. which means it is selling at a very cheap rate. and when you see the net profit or EPS in the balance sheet, it has grown at an average rate of 10%. Venus Remedies is trading at Rs 175 at NSE today, 29 Jan 2015.