Skip to main content

How to Do A Fundamental Analysis of Stocks


What are the key things to look for while buying a stock? It’s easy to make mistakes in the stock market, and it’s not just the first-time investor but even traders with some reasonable experience are prone to miscalculate. Some of the most common investment slipups include putting money in a stock while being clueless about how the company in question is generating or planning to generate profits.
Looking for short-term gains rather than viewing stocks as a long-term play is a common failing of a lot of investors. Some end up tying all of their hard-earned savings to the same industry or company instead of spreading out one’s options, which is certainly a less risky option. The more one gets emotional, the less rational one gets. So it’s advisable not to let strong feelings (e.g., fear, greed) and gut instincts take control of key investment decisions.
In any kind of investment, there is a scope for poor decision-making but a fundamental analysis of stocks can certainly help keep the margin of error to a bare minimum. Here are some useful indicators of a company’s performance and its financials. Based on these, an investor can decide whether investing in the stocks of the company will give her/him a good and realistic return on investment:
Earnings per share (EPS)
EPS is the portion of a company's profit that is allocated to each individual outstanding share (in the open market) for a given period. A consistently rising EPS over a period of 5-10 years indicates that the company is creating value for shareholders and paying them dividends.
Cash earnings per share (CEPS)
CEPS takes into account the cash generated by a business, on a per share basis, from its regular operations for a specific time period. Cash earnings are critical to the financial performance of any business. For example, a consistently growing EPS over a period of 5-10 years is a good sign but doesn’t indicate that the business is in the pink of health. To arrive at that conclusion, there should be a corresponding rise in CEPS as well. Else, there is a strong possibility that the business is not generating enough cash. And add to that, the income statement might be overstating profits!
Net profit margin ratio
Another metric of the fundamental analysis of stocks is net profit margin ratio, which clearly shows what percentage of profit is available to the investor as dividend for every rupee of sales revenue. For instance, if the net profit or “bottom line” (i.e., gross profit minus expenses like operating expenses, interest, and taxes) of a business is INR 10 lacs and sales revenue is INR 50 lacs, the net profit margin ratio is 0.25 or 25 percent. Businesses with a higher net profit margin ratio leave more profits per rupee of sale in the hands of investors.   
Debt/equity ratio
The financial assets of a given business typically comprises equity (shareholder’s contribution) and debt (borrowings from banks and other lenders in the form of loans, bond, and other short-term debt instruments). Companies with a low debt or zero debt are any day safer investment destinations than those with a higher debt-to-equity ratio (“leveraged companies”) because the latter may not be able to generate enough profits to repay debts and may even go into bankruptcy.
Return on capital employed (ROCE)
If a business posts net operating profits (before interest and tax) of INR 15 on a capital of INR 100, its ROCE is 15% (i.e., 15/100). It is a measure to assess whether or not a company is using the capital at its disposal efficiently. In any case, ROCE should be higher than the combined expected rate of return payable to equity holders and interest rates charged by creditors.
Dividend per share
This ratio indicates how much dividend a business is distributing against each share in the open market. A growing dividend per share suggests the company is good to stay invested in.
Apart from the financial indicators mentioned above, companies come out with annual reports that provide investors with valuable information on their financial performance, so a reading of relevant sections of this report should also be a part of the fundamental analysis of company stocks. Also, do keep in mind that the above methods of determining the essential value of a stock are not comprehensive. And most importantly be careful with your money.

Comments

Post a Comment

Popular posts from this blog

Charge Your Mood With Homemade Recipes

 When you crave for some good foods but feeling lazy to run errands, all you want to do is cook at home. Most of the time we crave for buttery foods, it keeps our mood satisfied and make us happy. Now you might be worried about how to make some tasty recipes with butter at home.  There are several cooking recipes is available all over the internet. One among them is the making of Healthy Sweet Vanilla Biscuits Recipe. The ingredients measurements are taken to serve 4 people. You need: •    2 cups of Maida, •    100 grams of castor sugar, •    ¾ tsp Vanilla essence, •    ½ cup milk, •    ½ cup custard powder, •    ½ tsp of baking soda and •    ¾ tsp of baking powder, •    1cup butter Method : Take a non-stick pan, pour the milk into it, now keep adding the custard powder and continue to cook till the mixture becomes thick. Remove the mixture, strain the custar...
Post a Comment
Read more

Why You Need Healthy Spreads On Your Table Today

You may have already read up on butter spreads uses and how these contain several properties that make meals tastier and more fulfilling by all means. Along with checking out butter spreads, you can consider checking out healthier alternatives for your table. A healthier and fitter lifestyle is always vital in the current environment where your immunity is important and so is low cholesterol. In the rush and tumble of our hectic daily lives, we often forget to consume healthy options on a regular basis, leading to a whole host of lifestyle ailments in the future. As a result, reading up on healthier spreads is highly recommended by experts. Nutralite offers a wide range of table spreads ranging from mayonnaise spreads and choco spreads to other table spreads. Nutralite knows that consuming the right amount of essential nutrients is vital every day for people and with no time to exercise and monitor our daily diets, we are now forced to consider healthier alternatives for our regular me...
Post a Comment
Read more

Find The Best Ammonia Free Black Hair Color With Ease

  When it comes to getting hold of the finest ammonia free black hair color, you can definitely try Super Vasmol 33 Kesh Kala from the house of Vasmol, one of India’s biggest and most reputed brands in the hair care and coloring segment. This product is certainly the best ammonia free hair color available in India and has been around for several decades now, being a trusted favorite for thousands of Indian customers over the years. This is a hair color that is oil based and nourishes your hair effectively while giving it a natural look of its own. The product can be applied as simply as applying regular hair oil. There is no ammonia content and the goodness of three nourishing oils can be tapped for better hair growth. These are walnut, almond and olive oils and the product makes use of atmospheric oxygen for coloring your hair. There is no peroxide content as well and mixing is not needed too. The product can be applied in a series of simple steps and nourishes hair simultaneous...
Post a Comment
Read more