There is a total of 6000+ companies listed on the NSE and BSE exchanges altogether! Now how will one find if the company they are thinking to invest into is good enough? How can one be a little certain that their invested amount won’t vanish into thin air?
A wise investor will plan to invest their money into a list of 10 to 20 odd companies, which are financially good having the potential to generate wealth for them. The question lies in how to find those companies. Well, here are we with 10 basic parameters and ratios that even a beginner trader or investor can analyze to do Stock Fundamental Analysis and find their first investments.
– Net Profit Margin:
Net Profit Margin tells us how much net income or PAT (Profit After Tax) is generated from the revenue and is always expressed in percentage. In simple terms, the net profit margin is the ratio of net profits to revenues. A higher net profit percentage means that the company is profiteering from its customers through its products and services.
– Debt to Equity Ratio:
The debt to Equity ratio tells us how much debt the company owes to its lenders with respect to equity. To put it in simpler terms it is a measure of how much debt the company has to its equity capital. Let’s understand this by an example- If the Debt/Equity ratio is 1, it means for 1 rupee of equity there is a debt of 1 rupee. If the D/E ratio is 2, it means for 1 rupee of equity, the company has 2 rupees of debt.
This ratio gives an idea of how heavily the company’s capital is financed. A high Debt/Equity ratio indicates high debt, implying high-risk investing. It is a high risk as when the company faces an adverse market cycle, it will have lesser to no profits but still has to pay its debt, which increases the chances of bankruptcy.
A D/E ratio of less than or equal to 1 is considered good and preferable.
But one more important factor to consider is that D/E also varies from industry to industry
ROCE or return on capital employed is a financial ratio that measures the efficiency of a company on the grounds of utilizing its capital. Let us understand this clearly with an example. Let us say a company has Rs. 1000 as capital and has generated a return of Rs. 200 with that. It implies that the company’s ROCE is 20%.
While selecting the stocks for investment, it is important to choose companies with higher ROCE.
The amount of profit a company earns against each share is called EPS, also known as earnings per share.
Basic EPS: This ratio tells us about the company’s earnings against each outstanding share.
Cash EPS: This ratio tells us how much cash a company is generating against each share of the company.
Note: Cash EPS considers the cash flow generated by a company on a per-share basis, whereas basic EPS talks about the net income generated on a per-share basis, for the given period.
– Past Financial Performance
One more important factor to consider while doing a Fundamental Analysis of stocks is to investigate the company’s financial performance. It’s done with the help of Annual Reports which answers the following important questions:
“Was this company able to achieve its goals in the past?”
“Future plans and targets of this company”
Annual reports give us a clear idea of what the company’s management does with its business with the future in mind. It tells whether the company has reached its goals or not. A company with a clear, foresighted set of goals is a good company to invest in.
– Analyzing The Future Plans:
Every company has its own plans for expansion and growth. They are like road maps that speak volumes about the direction in which the company is headed to. A company that is open to the thoughts of expanding is a better company. With expected diversification, mergers, or acquisitions, the forecasted revenues and profits are bound to increase.
– Hard Core Critical Analysis:
In this step of Stock Fundamental Analysis, it is vital to write down all rational reasons for the ultimate question- Why I should buy and invest in this stock?
This makes you understand the reason behind your investment and build faith in the company. This activity will also enlighten you on the areas in which you have to be cautious while investing and comprehend the ideology behind why the buying and selling reasons should be the same. If you fail to fill out a page with logical reasons to “Why to buy that stock”, then you should not consider it in your investment portfolio, or at least give it a sizeable portion of your capital.
– Wait for the right price:
By the time you have reached to this point, the core analysis part of the analysis is already over. Now all that is left is to identify the right buying price for the stock. After doing the Stock Fundamental Analysis, you can take a small break. To buy you must check the following two factors:
– Price/Earnings ratio.
– Market Correction.
If the market is undergoing a correction, then viola! You have hit a jackpot! Consider it as a golden opportunity to buy the stock when they start rising again (You don’t want to get trapped in further corrections). Because during market corrections, great stocks are available at discounts, and you don’t want to miss the offer
– Past 5-Year Analysis
Remember to conduct a periodic 5-year analysis every financial year so you’re in touch with your investments. If any discrepancy arises, one can see to it in the financial sheets of the company itself.
– Ensure Time-Time Review
You would have probably heard the phrase- Invest and forget. Even if you forget, make sure that you remember it on the annual result day. Stay tuned to its performance news, and year-on-year performance. The rest of other news could be irrelevant and could be neglected.
You can even take a Stock Fundamental Analysis Course to boost your knowledge. As a bonus gift, you can enroll in one of the Best Free Stock Market Webinars which deals with investment stock selection.