A typical risk averse investor would prefer to invest a chunk of his money in risk free government bonds, fixed deposits and other statutory investments such as PPF, etc, thereby earning sub-optimal returns. Now, how about you investing in the stock market in securities that promise the same security and at the same time super normal returns? Sounds utopian, read on...

Let us now take an example that you invest in a stock with the worst-case scenario purpose. The fact that you invest in the stock is proof enough that you believe the stock prices to move further up with positive growth indicators for the industry in general and the company in particular.

Now, suppose you had purchased shares of Gas Authority of India at Rs 75 as on March 31, 2003. At this price, as a risk averse investor, your primary concern is the safety of your investment. Therefore, let us now analyse the main aspects, viz., the worst-case scenario and how much do you stand to lose if the company goes into liquidation.

If the company goes into liquidation, it would have to pay off its creditors who have a first right on the fixed assets as a collateral (security) and then to the preference shareholders following which the residual amount shall be paid off to the equity shareholders. It is therefore important to calculate this residual amount that shall be paid to you. Let us have a snapshot of the main contents of the balance sheet of the company:

Assets		Liabilities
(Rs cr)	FY03	(Rs cr)	FY03
Current assets	4643	Current Liabilities	1993
Investments	687	Prov.	782
Fixed assets	6950	Total Debt	2047
Total	12,281	Total	4823

From the above table, it is clear that the company would be left with around Rs 7464 crore (Rs 74.64 billion) after paying off all the debts including current liabilities and provisions. Now the total market cap at Rs 75 per share (considering that the company has 84.56 crore shares) stands at Rs 6342 crore (Rs 63.42 billion) as on March 31, 2003. The difference between the amount that the company has been left with and the market cap is a healthy Rs 1122 crore (Rs 11.22 billion).

At a residual balance of Rs 7464 crore (Rs 74.64 billion)  (excluding reserves), the price that shall be paid back to the investor would be approximately Rs 88 per share. Remember, the amount you had invested was only Rs 75. The above example may be a rare scenario where your money enjoys safety and gives you decent returns. So could we say that you missed the bus!!! Well not necessarily, as there is always next time in the stock markets.

Companies	P/BV (x)	RONW (%) (FY05E)
Escorts	0.5	7.5%
Indo-Gulf Fert.	0.8	15.1%
VSNL	0.8	6.1%
MTNL	0.9	7.4%
Essel Propack	0.9	11.4%
Tata Power	1.0	9.9%
NIIT	1.0	2.3%
Kochi Refineries	1.2	21.6%
Indian Rayon	1.2	12.5%
Arvind Mills	1.2	12.5%
HPCL	1.3	17.7%

The following chart gives you a perspective as to how much you would have made had you invested Rs 100 in GAIL as against the amount invested in the BSE Sensex as on March 31, 2003.

The main idea is not to spell out the stocks with such rare opportunities but to highlight the fact that investors need to study the target company first with the main focus being on the how much you stand to lose in the event of the company shutting shop.