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On May 18th 2018, a young chap asked us to look at an SME company that had grown 5500% since its IPO. The company was operating in a very niche area in Market Research, but had some pretty unbelievable numbers going for it, and it was just about to release its full-year results 
We were tasked with preparing a report on the stock, because although the numbers were stellar, the stock price had been declining for about a year now. We put on our thinking caps and got to work. We combed through each line of the accounting statements searching for red flags
We believed that if the company was fudging numbers, we would find traces of it here. But no matter how hard we looked, the numbers kept coming back looking all legit & further analysis only confirmed that the company was in line to double its top & bottom line once again
A week later when the results were announced, we felt vindicated because our predictions were in line with what the company posted. Unfortunately, despite the stellar financials, the stock price tumbled from Rs. 200+ to about Rs. 100 within a week. What on earth did we miss?
It was slowly beginning to dawn on us that the company was most likely a sham. But we just couldn't prove it. We looked at employee accounts, Spoke to insiders. Looked at the accounting statements for hours. But no slip-ups. Nothing. Until we finally found the missing link
The company had claimed to be a leader in deploying technological resources to conduct market research and yet housed only 25 lakhs worth of computers and computer systems in its offices while making close to 44 Cr. in revenues.
This isn’t of particular interest until you note that its sister company, another market research entity housed close to 2.5 Cr worth of computers, despite having considerably less revenue & largely restricting itself to fieldwork & qualitative research.
And then there were the damned computers again. The company had made an acquisition a few months earlier The acquired entity housed close to 2 Cr worth of computers. Post-acquisition however, they discarded nearly 1 Cr. worth of computers & still somehow managed to double revenue
After all that research, the only way we could nail this company was by looking at a small line in the accounting statement titled. Computers&Computer Systems. And even that was a stretch. We wrote another report soon after urging our friend to exit. The price was at Rs. 70 then
Today the company is nearly dead. The stock languishes at a mere 8 Rs. Trading has all but completely seized and the company in all likelihood is shuttered. The sister company is dead too. And our friend who originally brought the idea to us probably never recovered.
Folks, if you find something that's good to be true, it is probably too good to be true. Even digging deep into financial statements might not reveal everything. So if you're investing in little known stocks in the hopes of finding everlasting riches. Maybe think again.
