Tuesday, 19 June 2012

When The Going Gets Tough, Austerity Measures Set In

The financials of any Sector are mainly dependent on many factors. As most of the stock prices by and large are a product of ‘implied value’ rather than explicit valuation terms, it seems to cause juxtaposition between the word ‘price’ of share and the perceived ‘value’ of share. As Warren Buffet eloquently put it ‘Price is what you pay. Value is what you get’

In these times, it is very important for a company to maintain its bottom line. A company can do this in a variety of ways- the simplest of which would be to enhance its turnover and sales volume. But this strategy generally does not work in recessionary times. As more and more austerity measures are put through and companies all across the world face a dilemma on excessive spending, many corporates have felt the need to tighten the belt. With countries in Europe stacked up like a series of dominoes, one can be sure that a slight tumble would have far reaching effects. Greece has already acknowledged that it is in deep trouble while Spain is on the verge of being so.

In these times of a global negative sentiment, what is important is not strengthening your base, but living to fight another day. As discussed in the above paragraph, enhancing the bottom line by enhancing the turnover or deliverables is not possible in these recessionary times. So the only way to do so would be by cutting down costs. Companies can outsource their core operations to a country who inspite of having a weaker currency can deliver high standards of qualitative output. By doing so, they can effectively curtail their costs and maintain or even significantly enhance their bottom line. Take the case of Apple Inc. By outsourcing the manufacturing of their products to industries in China, they have gone from strength to strength and built up a cash reserve of more than 190 bn. This figure, by the way, exceeds the cash reserves of USA itself.

‘Desperate times call for desperate measures’. While this proverb may not actually reflect the scheme of things in the world right now, it is getting scarily close to the events which may stage a prophecy of a global meltdown. The million dollar question is ‘are you willing to act now or will you wait until it is too late’?