Five companies that suffered a quality dip

Before investing in a company, we typically assess several factors. One such factor is its quality. Quality is one of the most crucial aspects to evaluate when investing in a stock . The better a company's metrics, the better its quality and vice-versa. Using our newly introduced Stock Ratings tool, we decided to find companies that were once considered gems but witnessed a deterioration in their quality in recent years. How were the quality scores calculated? Broadly, two parameters were considered while assigning quality scores to the companies - business efficiency and balance sheet quality. While business efficiency looks at a firm's profitability and past returns (based on metrics such as ROE, ROCE, operating profit margins and debtor to sales), balance sheet quality assesses companies on their historical performance and how well they sustained themselves during lean periods (using the debt-to-equity ratio, contingent liabilities and working capital). Based on the above criteria, we found five such companies: Anjani Portland Cement Bodal Chemicals Rupa & Company Shilpa Medicare Zee Entertainment These firms had a quality rating of 8 or higher in FY18 but fell to 2 or below as of January 2024. All, except one, reported negative returns over a six-year period, as shown in the table below. Companies that lost their sheen None of them could beat the Sensex returns of 14 per cent Company Quality score (FY18) Quality score (January 2024) 6Y returns (% pa) Anjani Portland Cement 9 2 4.8 Bodal Chemicals 9 2