fundamental analysis
fundamental analysis
Introducation
Fundamental analysis is a method of evaluating the intrinsic value of a stock. This form of analysis combines external events and influences, as well as financial statements and industry trends.
The fair value of a stock does not change everyday;To understand what is that fair value, you should take the help of fundamentals, which are what drives prices up and down.
Importance :
Fundamental analysis is a way to avoid short-term information about a company/stock. Every day there is some news on stocks.
When you buy a Mango from the market, you pay a price that you think is right. If a fruit seller asks you to pay Rs 100 for a Mango is that right ? In the same way, if a Mango is available for 1 Rs. is that right ?
If the Mango is available at a Big discount or Big premium, there must be valid reasons for that price.
As a long term invsetment you buy the stock at a far lower price than the intrinsic value
example - if the true value of PVR is Rs 1000, buying it for Rs 900 is logical. On the other hand, if the true value of PVR stock is Rs 900, buying it at Rs 1100 is not a good deal for you.
All good stock brokerages have their research desk. A fundamental report of a company/stock covers these in detail and so these are among the benefits of fundamental analysis.
These r
eports are usually 6-10 pages long. They discuss the company's financial results, give data on the company's historical profit & loss as well as balance sheet. There is also a valuation view provided so that investors can know how much are they paying for the stock given its prospects. Some charts and graphics are also present in each fundamental report.
These r
eports are usually 6-10 pages long. They discuss the company's financial results, give data on the company's historical profit & loss as well as balance sheet. There is also a valuation view provided so that investors can know how much are they paying for the stock given its prospects. Some charts and graphics are also present in each fundamental report.
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Point in Annual Report :
- Financial highlights
- Management discussion & analysis
- 10 year financial highlights
- Director’s report
- Report on corporate governance
- Notices
- Annexures (if any)
- Components of Fundamental Analysis
- Earning Per Share is called EPS. This is a measure of profitability.
- EPS = Net Profit of The Company divided Number of Outstanding Shares
- Price to Earnings Ratio is called P/E ratio. This is a measure of valuation.
- P/E = Price of Stock divided Earnings Per Share
- Price to Book ratio is called P/B ratio. This is a measure of valuation for banking and financial companies.
- P/B = Price of Stock divided Book Value of Stock/Company
- Debt to Equity ratio is called D/E. This is a measure of indebtedness.
- Debt to Equity Ratio = Total Liabilities of the company divided Total shareholder’s equity
- Return on Equity Ratio is called RoE. It is a profit measure that can be generated with the money that has been invested by its shareholders.
- Return on equity = Net Income of company divided by Shareholder’s equity
There are steps that you need to follow to analyse the fundamentals of a company.
- Understand the company first
- Use the financial ratios for initial screening
- Closely study the financial reports of the company. - Balance sheet / Profit & Loss A/c/ Cash Flow statment / Note to Account & other report/anx.
- Find the company's competitors/rivals and study them.
- Check the company’s debt and compare with rivals.
- Analyse the company’s future prospects
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