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Reliance Industries is a very popular business in India. A lot of emotions are attached to this business for  lot of investors and traders in the market. Many investors have written emails to me in regards to this business and I have also participated in many discussions and have written posts in past.

After the financial crisis or in last five years this business had never attracted my money to invest with and I think this is the right business to give example on how to become a poor by investing in this business.

This business has given a return of 4% in last one year (As of 18th April 2013) and -23% returns from last 2 years and -41% from last 5 years. Within this last five years they have given a bonus shares (split in ratio of 1:1) and if I do still consider that then they have given a return of 19% for last five years.

Reliance industries is a capital intensified business and they need regular cash to be reinvested within the business. This reinvestment is not for the growth but for the maintenance. This is one of the worst kinds of businesses.

Charlie Munger noted this at the aforementioned Berkshire AGM:

“There are two kinds of businesses: the first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested – there’s never any cash. It reminds me of the guy who looks at all of his equipment and say, ‘there’s all of my profit.’ We hate that kind of business.”

 

If you are the investor within this business and can do a bit of high school maths then let me take you back for a year. Also keep 2013 consolidated financial reports ready for your references to double check the numbers.

The return on equity for the year end 2012 for Reliance Industries was 13%. They reported profits of Rs 19,724 Crore. They paid approximately Rs 2,958 Crore in dividends and dividend taxes and spent Rs 4,000 Crore in buying back shares. They reinvested Rs 12,585 Crore back in the business for maintenance. This additional money helped this business to grow their profits by Rs 1,155 Crore (Rs19,724 + Rs 1,155 = Rs 20,879) for the 2013 year. This reflects a return of only 9% on additional shareholders fund (Rs1,155/Rs 12,585).

This low return on additional shareholders fund have resulted its return on equity for the year end 2013 to go down to 12%.

If you understand the concept of compounding of the money then I have not seen anyone becoming rich by investing in assets with low returns. If this trend continues, you are going to be definitely become poor!!