How to do Fundamental Analysis of a stock
Welcome back to the new post where we are going to discuss the Fundamental Analysis. Most of us have come across this question that how to do the Fundamental Analysis (i.e, going through the Balance Sheet, Financials of the Company) and it is quite important for an investor as we are investing our money for a long term duration so we should know the each and every aspect of the stock which enhances our confidence in the investing.
The stock which is Fundamentally as well as Technically fit is the WINNING Stock of the future so this is quite important in this part we are going through the Fundamentals and in the upcoming part the Technicals.
Analysis of the Balance Sheet
In the markets, data is the blood, and in real life, doctors are also able to diagnose diseases through blood tests. Similarly, the Balance Sheet and other mandatory data are referred to as the blood of the body.
Key Matrices to look over
- Assets
- Liabilities
The Assets are referred to as those that are responsible for the inflow of money in the company. In simple words, the resources of the company which are used to earn money. The high number of assets is appreciated (i.e, referred to as good)
The Liabilities are referred to as the Outflow of money in the company. The simple words the costing (i.e, paying the bills, charges, etc.) The best one is TOTAL ASSETS = TOTAL LIABILITIES the golden rule for analysing the assets and liabilities.
EX. Imagine that a person is having multiple sources of income, so that come into the ASSETS, and whatever bills (Electricity bills, DTH bills, internet bills) are the LIABILITIES that you have to pay on time.
Financials
The financial are very helpful to identify whether the company is MULTIBAGGER or MULTIBEGGER a small difference but a huge impact. Important aspects to be look after
Profit and Loss
The company that is consistently growing its profits year on year is preferred as best for investing. The most important thing is to know whether the company is profitable or not so this test is essential if it is in the red (loss), then you may avoid that stock and search for other opportunities.
Cash Flows
The cash in the hands of the company is referred to as Cash Flows. Most important is that the company should have increasing [CASH FLOW FROM OPERATIONS] if it is positive and year on year increasing, then all is good and may be considered for investing. This indicates that the company is managing its cash effectively.
Debt
Most important is to look for the Debt, the company that is in Debt cannot give you excellent returns, you would not be able to beat the index as well.So its important that the debt-free company can give you more returns and result in consistent compounding of the wealth. As shown in the image highlighted by the yellow ink. The debt could be required for the expansion so it’s ok to have a debt but always make sure if the debt is for the expansion, so go through the concall and investor meetings available at the screener also make sure that the company is having enough assets to pay the debts.
ROE and ROCE
ROE (Return on Investment)- The most important parameter to analyse is what rate of return you would get. The (ROE >=20) is referred to as great.
ROCE (Return on Capital Employed)- Another parameter to analyse the returns. The (ROCE >=20) is referred to as great. As shown in the image highlighted by the yellow ink.
Shareholding
Another important parameter is the shareholding, it depicts the interest of the PROMOTERS, FII (FOREIGN INSTITUTIONAL INVESTOR), DII (DOMESTIC INSTITUTIONAL INVESTOR) the holdings should be (FII > =15%) same in case of (DII >=15%) the PROMOTER HOLDING as much as possible is great .
NOTE- In some stocks the PROMOTE HOLDING is very low or even zero still they are a good company if the FII and DII are investing.
Promoter Holding Pledge
Here, the promoter holding pledge should be zero (Green Flag or Good). If it is zero, then the stock is good; otherwise, don’t even buy a single share if the promoter share holdings are pledged (Red Flag or not good). If the holdings are pledged then it shows that the promoter of the company had raised capital or Debt by pledging the shares, which is not beneficial. Clearly, it shows that the promoter is going to exit the company, and so the stock price will fall, so don’t invest if the holdings are pledged.
Sales
The parameter that indicates the demand in the markets, if the sales are increasing in (Quarterly, Half Yearly, Yearly) then the company is great. A Consistent rise in sales is a Green Flag for the growth of a company and indicates that the Overcall Company is performing well and can upscale in the future.
EPS (Earning per Share)
The parameter which depicts the real growth of the company, it is most important to analyse whether the stock is bullish only due to the sentiments or a real growth. To identify the bubble
Source – to get the Fundamental data of a stock for fundamental analysis
https://www.tradingview.com/#main-market-summary
See you in the next content
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